While Israel’s securities lending market has coped surprisingly well over the last few years, the potential in Israel’s securities lending market has not yet been fulfilled. However, technologies such as blockchain aims to enable direct lending among major financial instruments in the country to improve the securities lending status. Earlier this year, the Tel Aviv Stock Exchange (TASE) announced the development of a blockchain-powered securities lending platform, which is set to enable direct lending among all major financial instruments in the country.
Commenting on the current state of Israel’s securities lending industry, Orly Grinfeld, executive vice president and head of clearing at TASE, said: “Currently, the securities lending market in Israel is managed by the largest four global custodian’s banks and the system is working in silo mechanism, which means that each custodian operates securities lending transactions inside the banks—between its clients.”
“As a result, there are four securities lending desks, which are not working with each other. Therefore, the market is pretty big but it is not sophisticated and efficient enough. Our purpose is to find a way to open the market and enable each custodian to work with the other custodian’s clients, which would make the whole market bigger and more efficient.”
Grinfeld noted that a much more sophisticated securities lending market in Israel could be gained if they were able to create one centralised automated and transparent system, which was open to the whole market.
She added: “This would enable every participant direct access to the securities lending market. We call this new product ‘central securities lending’. This new product will generate an automated, transparent and efficient lending market and that’s the way we hope to increase the volumes of this market.”
Grinfeld explained that TASE has been exploring the blockchain technology lately, and they believe it may be one of the leading technologies of the financial world in the future.
“Right now, we only see the blockchain technology in distributed products such as cryptocurrencies. We haven’t seen it working in financial institutions like exchanges, banks and depositories, and this product means to demonstrate how we can use blockchain technology in centralised entities such as exchanges”, Grinfeld added.
Blockchain bolstering growth
In May this year, TASE chief executive Ittai Ben-Zeev stated: “The blockchain technology will present a new level of safety for securities lending and will support growth for transactions based on this new platform”. In regards to this, Grinfeld said that this project has successfully completed its proof of concept phase.
She added: “We are now in the development phase with our partners—Accenture and Intel with one of the most advanced technologies. Right now the project has been quite successful and has fulfilled our expectations.”
Reflecting on Ben-Zeev’s statement, Ofer Abarbanel, CEO of State Funds, commented: “Yes, I agree, blockchain is a great technology but when it comes to changes you must have all TASE members and regulators devote time and effort into upgrading the market. If we see the start of a recession in 2019 then all of the upgrades will be pushed back indefinitely.”
Meanwhile, Martin Seagroatt, marketing director, securities finance and collateral management, Broadridge, said: “Blockchain platforms can help to mobilise assets more rapidly, with reductions in settlement risk, operational risk and credit risk.”
Seagroatt added: “Broadridge recently conducted a blockchain pilot with three sell-side firms and one buy-side firm to transact bilateral repo, and found the solution resulted in operational efficiencies and a more streamlined process. We expect to see more blockchain based platforms emerge as market participants become more comfortable with the technology and operational hurdles are overcome.”
Turning to technology
The impact of technology seems to be ever increasing, and Seagrott noted that technology is impacting the industry in a number of ways.
He stated: “Automation of certain aspects of trading, especially around general collateral (GC) business, frees up time for traders to focus their attention on intrinsic value trades.”
“Effective trading now requires a higher degree of connectivity and straight through processing between a firm’s systems, electronic markets and benchmarking data vendors, and a strong global inventory management function.”
In terms of growth, Seagrott noted that collateral optimisation continues to grow in importance and now involves more complex decisions around balance sheet usage, capital consumption and liquidity management, and all of which are supported by state of the art technology solutions.
“As time goes on, we expect to see the evolution of more sophisticated trade and collateral pricing. This could see machine learning algorithms that process large volumes of data to price lending fees or optimise collateral allocations more effectively for example”, he explained.
Seagrott added: “In addition, we are seeing increasing automation of manually intensive tasks such as corporate actions processing while improving settlement efficiency is also becoming more critical. In this environment, technology solutions that can help to track and reduce settlement failures can provide significant benefits.”
Abarbanel said: “Technology helps level the playing field, you can get great computing power and cybersecurity just like the biggest banks in the world by moving everything into the cloud and paying for only what you use without incurring heavy infrastructure expenditures.”
Trends, concerns and challenges
In terms of trends and referring to TASE’s new platform, Grinfeld said this new securities lending is going to be a game changer in the securities market in Israel. She explained: “The new product will open the market and enable direct participation for each player in the market—even the smaller players. The market will be much more efficient and transparent, and the costs will be lower and the volumes will grow higher. We believe it is going to double and triple the volumes of the current securities lending market in Israel.”
Also discussing current trends in Israel, Abarbanel highlighted that there are more players [in the industry] such as foreign banks, securities lending platforms and credit funds are coming into the market using cloud technology to keep it all cost-effective.
Regarding regulation, TASE’s new platform is not expected to meet any major burdens. TASE is regulated by the Israel Securities Authority (ISA) and everything that they launch and every new product is coordinated with the ISA and approved by the ISA.
“From our point of view”, Grinfeld said, “the product is going to decrease the risks for the participants. TASE is going to be obligated as a central counterparty (CCP) for the new system, which means it gives the full obligation to complete each lending transaction even if the counterparty did not fulfil their part. In terms of regulation, it decreases risks in the market and that is one of the interests of the regulator.”
Abarbanel added: “Regulations have not changed since the regulators personally know all participants and how risk-averse we all are.”
In terms of challenges and opportunities, Abarbanel stated: “Technology is the challenge and opportunity, with good, cost-effective technology you improve everything, better marketing, better operations and better cybersecurity.”
Grinfeld highlighted that bringing demands from outside of Israel and bringing foreign participants and players to use the Israeli capital market in general—but specifically to use the lending opportunities in Israel—is one of the major challenges that TASE sees.
Elaborating on this, she continued: “We hear that the securities market in Israel is gaining lots of interest for foreign investors, but it is not sophisticated and accessible enough for them. We believe that once we complete the system it would be a great opportunity for international entities to take part in the securities lending market in Israel. Most of the usage of the blockchain technology, which enables a more secure environment for securities lending transactions, would give the foreign investor much more convenience in using the new platform.”
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder TBIL.co STATX Fund.