Session Summaries from the 2021 PASLA/RMA Updates on Asian Securities Lending

The recent PASLA/RMA Update on Asian Securities Lending brought together leaders in the securities lending industry in the APAC region for two great days of panel discussions from industry leaders. Discussion topics included:

• Environmental, Social, and Governance
• The Future of Securities Lending in the Asia-Pacific Region
• Fintech and Emerging Technologies
• The Hong Kong/China Relationship
• Developing Market Opportunities
• Key Figures in the Industry

Session: Disrupter or Distracter? The Practical Impact of Fintech on Financial Services

Moderator: O’delle Burke, Head of Collateral Management Product – APAC, Securities Services, J.P. Morgan

Panelists: Kiranjeet Dhillon, Head of Fund Services, Technology & Innovation, Standard Chartered Bank; Matthew Long, Head of Distribution and Prime Brokerage, OSL; Paul Lynch, Managing Director, Global Head of Products, EquiLend

There is a significant presence of financial technology, or fintech, in the securities borrowing and lending (SBL) space. But is it a disrupter or distracter? The consensus of this panel points to fintech as an enhancer.

Fintech within SBL means enhancing client experiences with technology. Fintech companies work within the ecosystems of the SBL community to create platforms, house data post-trade, and so forth. It is important, however, to have a clear understanding of fintech’s business context and how it will accelerate and support client needs. The one area where fintech has struggled is the distributed ledger space, mainly because individual banks have not yet built models. Without the individual participants in the community completing their models, it is difficult to treat an ecosystem in the middle.

How does the industry see the current fintech landscape as it relates to digital assets? There is an evolution in digital assets for prime brokerage, and the way the industry is evolving is largely emulating many of the products found in traditional finance. The industry is evolving quickly, and technology is facilitating those changes. We will likely see more traditional custodians and prime brokers converging in the digital asset space.

Over the last 9 to 12 months, there has also been a clear institutional demand for exposure to digital assets such as bitcoin. The institutional adoption has been driving the desire for traditional finance (banks and custodians) to invest in the space, which in turn is spurring investors like pensions, hedge funds, and sovereigns to take positions in digital assets.

Digital assets are also being used as collateral. The same way collateral is taken in equities applies to the collateral management of bitcoin and other digital assets. There is an informal movement globally to have a master lending agreement for the industry. A panelist addressed the question of which digital assets are acceptable as collateral while expanding on CBL (coin borrowing lending).  Ethereum and bitcoin were among the options discussed.

Industry participants have been quick to adopt some technologies and slow to accept others. What influences the pace of integration? Innovation is the simple answer. Innovation involves working with fintech companies, regulators, central banks, and industry partners to drive that adoption. In securities lending, the transformation cannot be piecemeal. It is important to “future-proof” the tech architecture to build interfaces that will allow banks to move away from traditional reporting.

But with growth comes risks and challenges, including regulatory and compliance. Cyber risk has historically been at the forefront of the digital asset industry. Mitigants come into play around the safe custody of assets and how custodians can provide what is now considered secure custody, with an overlay of insurance. There have been many cybersecurity incidents in the history of the digital asset community. But what has evolved to mitigate away those risks has been the growth in regulated and insured custodians. A customer onboarding with a regulated digital asset platform should have the same level of comfort and security as onboarding with a prime broker or bank. 

Another challenge is around the source of funds. The technology allows digital asset platforms to have a clear view of the source of new digital assets or coins coming into the platform and apply a risk-based approach to understanding the source of funds, much the same way as any institution would do a source of funds analysis on a client.

The relationship between traditional prime/securities lending and fintech solutions is a collaborative one, whether it is a prime broker or agent lender looking for vendor solutions to enhance their business to create cost savings or efficiencies in processing. Everyone is looking for technology solutions that are regulated, and with that regulation comes infrastructure resiliency.