Advancements in technology and automation have allowed hedge funds to cut costs and improve efficiencies. One potential area to look at in the back office is in the area of securities lending.
As my colleague Tim Murray noted in his November 2012 article titled "Eastern Promise", the securities lending market took a major hit in the US and Europe with the financial crisis in 2008. But it is crawling its way back and is even being used as a key for entry into the Asia-Pacific region.
Securities (or stock) lending has traditionally taken place almost exclusively in the back office─though that is changing─and as often happens to back-office processes, it doesn't see the investment that front and middle office platforms and tools receive.
But as firms are looking to make better use of their IT budgets and find new ways to cut expenses while becoming more efficient─the current axiom of the entire industry─improving the back office and making it something more than a cost center to an area that actually produces returns is an enticing idea.
I recently spoke with Marshall Saffer, chief operating officer of MIK Fund Solutions, and he said that firms can benefit from improved spreads if the rate structures between lenders are arbitraged and optimized in real-time. This is more than a strategy fix; there are real IT implications involved.
"Ben Franklin once said, ‘A penny saved is a penny earned.' Well that aphorism, when applied to the stock lending equation, we move beyond passive thrift to actually deploying the back office as an active mechanism to increase returns. So this way the back office becomes a generator for ROI," he says.
What's required is a robust equity finance engine that allows firms to see financing data across brokers, regions, asset types, portfolio managers and traders. It also means automating the recording and tracking of stock loan locates and pre-borrows, which would also allow for the ability to find lower borrow rates. It will provide detailed reporting, trend charting, alerts and other tangible measures to assist in day-to-day operations.
There's obviously a cost associated with an overhaul of this scale. But it's also hard to ignore the potential opportunity to find returns out of the back office.
Do you know of additional ways to improve securities lending? Or ways to make the back office profitable? Send me an email to [email protected] or call me at 646-490-3973.
Bryan Cross, who heads UBS Asset Management's QED group, joins to discuss alternative data and AI.Subscribe to Weekly Wrap emails
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