Securities lending is often accused of a lack of transparency but has there been any improvement over the last few years?
Regulators and commentators frequently describe our market as opaque and to a degree I have to agree. We are reticent (perhaps understandably) to publicly disclose strategies, fee share, even loan values to the broader market. Consequently, outsiders to the market find information difficult to come by.
The industry has improved the level of transparency to the underlying schemes and investors that provide their assets for lending. In this space, there has been a significant improvement in reporting over the last few years and it is broadly recognised that investors are able to access information at a reasonably granular level if required. However one issue we face with this is interpretation. It may be easy to churn out transactional data but analysing and understanding it takes a good understanding of the market mechanics and without this knowledge it is very easy for non-practitioners to reach unhelpful conclusions about the risks and rewards of the activity. Core lending systems often have reasonable reporting tools for transactional data but it can be difficult to enrich this to make it meaningful within the system’s limitations. Clients now want integrated risk modelling and capital calculations as part of their reporting package as well as regulatory reporting requirements met on their behalf.
Regulators are beginning to push for increase transparency through various new regulation, including (but certainly not limited to) liquidity reporting, Solvency II, and short selling regulation. These reporting requirements will involve significant enrichment of transactional data to meet the prescriptive requirements being proposed. This includes investor protection through full disclosure of parameters and risk appetite prior to engagement, and on-going reporting of risks and exposures. There is little doubt that in the future virtually every aspect of this activity will need to be reported to regulators and it remains to be seen how much of this information is then made publically available. It seems that the industry remains at the other end of the spectrum to regulators in this respect and engagement with regulators will be key to finding a happy medium.
When transparency is forced on the market, such as lending disclosures in Hong Kong, it seems to be able to react relatively quickly to specific requirements but solutions tend to be tactical and often manually created. How many tactical reporting solutions can a business take?
MX Consulting is working with clients to deliver strategic enriched data and analysis to meet existing and future reporting requirements on behalf of clients and regulators. Solvency 2 is one of the most challenging regulatory reporting requirements the market faces and whilst this only affects insurance companies and some pension schemes at the moment, it is likely to affect a broader range of lenders over time and represent a huge challenge in itself for the industry. In the next issue I will be looking at the specific challenges in meeting the Solvency 2 requirements.
One thing is for sure, whilst the industry has come a long way in terms of transparency, there is still a more to do to meet the likely future requirements, and the ability to provide granular, enriched reporting and analysis, whether to clients, regulators or the rest of the market, will be a core factor in defining the future winners and losers in this market.