Securities Lending: Reflections on the Digital Transformation panel

From the desk of Roy Zimmerhansl

Practice Lead, Pierpoint Financial


This week I am sharing my thoughts on digital transformation, inspired by the recent panel I moderated, courtesy of EquiLend. I found the session a fascinating and honest exploration of the issues and I heartily recommend that people watch it either for the first time or if they have already seen it, watch it again. I’d like to thank the panelists whose comments and ideas are included in this post, so I will give credit to them cumulatively rather than ascribe individual thoughts to people. In the spirit of open architecture, in my view, no one owns these ideas, but ideas only have value if they are raised and debated which the panelists did extremely well. Let me thank them via the tyranny of alphabetical order: Ken DeGiglio (EquiLend), Nick Delikaris (State Street), Armeet Sandhu (Stonewain), David Shone (ISLA), Guido Stroemer (HQLA-x).


Having said that I won’t thank people individually, I will immediately discard that by thanking Ken credit for giving the panelists a very strong definition of Digital Transformation for the pre-event preparation which is as follows:

Digital Transformation is about leveraging technology to solve problems and create new operating models that automate and streamline traditionally manual processes; improve operational efficiency and scale; and potentially create new business opportunities, products, and solutions.


This ISN’T about technology; the tech is simply the ‘how’. It IS about the ‘why’, the problems that need solving; the inefficiencies that must be re-engineered; the streamlining that will facilitate low-cost scaling up of businesses; the new ideas that can be brought to market because securities lending is lower-cost, faster, more accessible and with a lower error rate.

I love the quote from the futurist/humanist Gerd Leonhard who said: “the future is in technology, yet the bigger future is in transcending it”. This is an important message. Tech for tech’s sake is meaningless and we have all seen examples of tech ‘solutions’ in search of problems. Yet I always wonder whether the failure to find a problem sometimes rests with the ‘experts’.


I saw a product prototype in 1985 from an inventor looking for money from my bank. It looked like an Etch-a-Sketch (picture below for those of you who don’t know what that is). People could write on this with a special pen, the unit would record it and then it could be transferred into a computer. We immediately saw an application – it would dramatically improve the prevailing process whereby we were taking client instructions over the phone for same-day settlement items, transcribing on to a piece of paper, to be handed to an ‘Input/Output’ operator who keyed it into the computer to create securities/cash movements. But the bank decided it was too risky and that there weren’t enough of these applications to make it worthwhile. It was of course an early version of an iPad, and as I don’t recall it being Steve Jobs asking us for the money, I assume the inventor didn’t get funding anywhere else. This was about 18 months after I trialled the first PC in the custody operations of that bank.

Transformation is not just applying technology – it is the human creativity and innovation that identifies the need for solutions and the opportunities for new products, trades and activities.

Etch-A-Sketch Classic - from www.spinmaster.com - NO BATTERIES!

Human nature is at the core of all decisions we make and one of the comments from the session was that the reason digital transformation is likely to succeed is this rare collision of the availability of tech, the exponential proliferation of data and the advent of Millennials. This creates conditions whereby data can be used, combined and processed efficiently by people that are not only willing to look at things differently but are almost hard-wired to do so. Irrespective of the odd debate over whether Moore’s Law is dead, processing power is clearly continuing to increase dramatically and less expensively. Data? According to Forbes at the end of last year, 90% of the world's data was generated in the last two years with 2.5 quintillion bytes data being created each day. No doubt the volume of data will double again once everyone is captured by SFTR!


As an old guy that has always promoted the application of technology solutions, I do rail against the stereotype that only Millennials or younger people see the value in automation and that older generations are fearful of being replaced by tech, but I also can see that it is true sometimes. However, it would be wrong to assume it is fear of tech per se. It is true that senior management are older and the decisions they make carry more weight and risk. Accordingly, senior management decisions take longer as they are more fraught with risk. Decisions that ‘move the needle’ can move it in either direction. Market leaders are understandably hesitant regarding transformation as there is no guarantee that they will remain market leaders after disruption. Think Nokia, the dominant mobile phone provider that was sidelined when they failed to respond to the trend that consumers wanted smartphones instead of robust basic models – I’ve never had a piece of equipment be so hardy or a battery that lasts as long. But that wasn’t enough and when I got my BlackBerry … wow! (that’s another story).


Let me also say that there are some people, of all ages, that DO like to do repetitive tasks and don’t want innovation in their jobs. They feel comfortable doing the same thing day-in, day-out – they like the certainty and predictability. If you can’t think of examples with colleagues, then try people in formerly communist countries who had lower standards of living under communism that were disrupted when elements of capitalism were introduced. While it created billionaires, some people ended up even worse and those are the people dreaming of the ‘good old days’ even if they don’t seem that good to other observers.

Let me repeat what I have said in speeches before – if your job is repetitive and you don’t bring problem-solving, innovation, creativity, sales, relationship management or similar to your job, your job is already at risk. Robots are and will continue to grow the role they have in financial markets, so consider how you will reinvent yourself in future because you will be forced to. That reinvention might be to a different industry, but I submit that all industries will be experiencing the same directional flow to digital transformation.


So, if this is all inevitable, why does it sometimes fail? At the individual company level, firms can transform themselves. Amazon of course is the best example. Individual firms making internal efforts to improve and automate are also examples in our daily life today, but in a bilateral, networked business, making yourself better has limits because you are reliant on your counterparty to also improve. That’s why everyone points to the success of SFTR.

One of the most interesting parts of the SFTR discussion on the panel was the agreement that SFTR was mostly successful because it was a regulatory mandate, but that was not the only reason for its success. The value of cooperation and common standards and focus was acknowledged by firms and they largely embraced SFTR. However, individuals drive the degree of application, so we have seen some firms where everything works smoothly, and others where is it a daily grind to comply.


This sets the stage for the Common Domain Model. If there are no standards, inefficiency prevails, if there are 5 standards, that is equivalent to no standard at all. I haven’t yet had someone tell me they don’t see the potential value in having agreed standards. Agreement on pain points prioritises the standards that need to be created. Once you have standards, technology can be applied to automate, and better technology built on common standards enables you to ‘automate on steroids’.


Securities lending (as opposed to repo or derivatives market participants) has a

structural disadvantage – it has an entire community that is one-directional – they are lenders only or agent lenders only. That provides another layer of complexity in agreeing on prioritisation. A failure to agree on priorities means that resources aren’t allocated by firms, undermining the impact of solutions, or perhaps deferring the creation of solutions in the first instance.

From INtel's Jim Keller: "Moore's Law is Not Dead" YouTube

The technology exists to solve many current issues, the next tech incremental iteration will solve more and that will continue. The real questions to my mind are:

  • Will market participants allocate high-quality human resources and budget to the identification and prioritisation of meaningful and challenging but achievable solutions to common but not necessarily ubiquitous problems?

  • Can trade associations transform themselves into vehicles that go beyond regulatory lobbying and ‘best practice’ and establish more demanding conformance while keeping their membership onside?

  • Will firms continue to work in the spirit of collaboration to make the market more efficient for all – arguably lowering the bar for participation, but enabling a focus on real business issues -competition on products, services and client experience?

Digital transformation is not about technology, it is about human creativity and innovation. Machines are good at replication and are getting better at learning. But they suck when it comes to creation.

#securitieslending #digitaltransformation #commondomainmodel

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Image by Miltiadis Fragkidis

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