Fidelity outlines investment strategy for growth of its agency lending business
05 September 2023
SFT spoke with four senior Fidelity leaders to discuss the importance of making technology and intellectual capital investments to enhance agency lending for clients. For this conversation, Bob Currie is joined by Fidelity executives Todd Bosworth, head of US trading, Yuri Brightly, head of securities finance platform, Marney McCabe, head of relationship management, and Jon Whiting, head of international trading
Image: Fidelity
Fidelity has applied intellectual capital from across its team to deliver a tech-driven securities lending programme. What form has this taken in practice, and how is this delivering a competitive advantage to your clients?
Yuri Brightly: As Fidelity Agency Lending makes strategic decisions about its investments in both resources and technology, we focus on reducing areas of friction for our clients and counterparties. With current market dynamics prompting institutions to take a more active role in their securities lending programmes, many organisations we speak with are concerned that a lack of automation is leading to compliance and programme exceptions, performance barriers and overall programme dissatisfaction.
Fidelity Investments has 23 years of firm-wide experience in the securities finance market and Fidelity Agency Lending鈥檚 management team on average has over 20 years of cross-industry experience. This deep experience has allowed us to build a strong foundation for our agency lending business. Our rule-based platform caters to lenders鈥� sophisticated customisation needs at a granular level and eliminates the need for overly restrictive parameters and manual intervention. With 92 per cent of Fidelity Agency Lending鈥檚 loan transactions using automated capabilities, our clients can capture a larger portion of market demand at advantageous rates and this can benefit their lending performance.
Jon Whiting: One notable benefit for clients is that their lendable assets are more attractive and accessible to the borrowing community. This translates to consistent outperformance 鈥� regardless of our clients鈥� size and asset composition. In fact, we outperformed our client peer groups by 17 per cent in the first quarter of 2023 and by 13 per cent for all of 2022. We also recognise that borrowers鈥� demands do not necessarily overlap. We can help to address the need for greater access to supply through our industry-leading performance. Finding additional value at the trade level is a particular strength of Fidelity鈥檚 teams and systems.
In advancing this strategy, how are you investing to deliver programme flexibility to clients?
Todd Bosworth: We believe changes in market dynamics like the 色花堂Financing Transactions Regulation (SFTR), T+1 settlement and SEC Rule 10c-1 will further differentiate and reward firms that make consistent and significant technology investments. Our technology strategy focuses on real-time capabilities, specifically the features and enhancements that enable faster decision making and execution capabilities on behalf of our clients.
For example, our lendable assets are calculated in real time and assume buy and sell activity throughout the day. Our real-time connectivity, and automated reconciliations with many of the largest global custodians, enable straight-through processing settlements and remove the need for batch processing. This is further complemented by real-time cash management, which enhances the lender鈥檚 reinvestment process, promotes timely issues of recalls, and reduces settlement latency. Another key to performance that leads to effective execution is our accurate and consistently updated pricing metrics, which also minimise post-execution book maintenance and resource usage. These are all examples of how we make investments with our clients鈥� most critical needs in mind.
Brightly: While supporting our clients鈥� programmes, we also recognise why they need both configuration and customisation capabilities and how the two differ. Configuration supports our clients鈥� parameters with existing functionality, while customisation supports a bespoke client rule-based requirement. Fidelity Agency Lending鈥檚 platform supports both in a way that offers more flexible and sophisticated programme parameters, allowing clients to achieve a truly tailored lending programme. Each of these highly bespoke parameters are systemically enforced, so all clients can fully participate in Fidelity Agency Lending鈥檚 automated lending programme. This approach ensures the best lending opportunity for all clients and the greatest access to supply for our borrowers.
Fidelity has invested in automation of securities-based lending (SBL) activities across the transaction lifecycle. Where do you identify the primary obstacles to efficient SBL processing from pre-trade and execution downstream across the lifecycle?
Whiting: Lack of vendor-to-vendor connectivity, archaic technology and intensified needs for reporting all come to mind as drivers of information flow and trade processing inefficiency in the SBL space. A one-time-build style of technology development has led to bolting on tangential solutions to dated infrastructure to solve new challenges and this has slowed the general evolution of the financing space. This approach to execution and reporting tools has proven to be flawed, especially since inputs and outputs are now more advanced among market participants.
We have watched these obstacles become increasingly apparent as the market requires greater automation and providers can鈥檛 make the necessary investments in talent or technology to keep up. With shorter settlement timeframes, transparency regulations, and a greater need for the most efficient trading partners, Fidelity Agency Lending focuses on leading technology solutions. And that is why we allocate more than 50 per cent of our annual budget to enhancing and managing our technology. Additionally, the agency lending business is a top initiative at Fidelity for our institutional clients. As such, we will continue to see a strong capital allocation to the programme.
How are you investing, and working with industry working groups, to eliminate these inefficiencies?
Marney McCabe: We need vendors to work together to eliminate fragmentation in the market. Removing competitive barriers and focusing on ways to compel the SBL industry forward will make it more attractive to lenders, borrowers, providers and regulators.
In the meantime, we spend time and resources at Fidelity Agency Lending to ensure that our programme can adapt quickly to market changes and apply intellectual capital to make our industry more efficient. For example, we are involved with the Risk Management Association and the International 色花堂Lending Association and can explore new routes to market via central counterparties. These efforts allow Fidelity Agency Lending to make investments that best position our business and our clients for success.
How are your clients鈥� trading requirements and expectations evolving in the securities lending environment and how are you refining your automated trading capabilities to meet this need?
Bosworth: As clients continue to optimise their programme performance, we also see them applying more sophisticated programme parameters and requirements. Alongside the need for greater automation, transparency and returns, lenders are seeking individualised parameters based on enhanced corporate governance policies supporting ESG, ownership-level restrictions, trading volume limits and minimum return thresholds.
Fidelity Agency Lending has responded to this dynamic by building a platform that operates at the highest levels in the industry, providing our clients not only with the potential for best returns, but also operating experience, risk management and reporting capabilities. Given our technology and the robust staffing in trading, product development and technology, most of the time we can build both core functionality and client-specific development in parallel. We embed client parameters and restrictions into our automated lending process. This enables the greatest access to demand and supply and translates into the opportunity to make the most out of every loan that Fidelity Agency Lending transacts on their behalf.
Why does Fidelity value a consultative approach to client management? What are the key steps to delivering this well?
McCabe: Fidelity Agency Lending invests significantly in the tools and resources that we use to service our clients. We recognise the oversight requirements of our clients and their boards, and that our appointment as their agent lender goes well beyond reporting and due diligence reviews.
At Fidelity Agency Lending, we empower our relationship managers and our client discussions through our service model, which is backed by more than 20 years of industry experience and real-time access to programme attributes. We draw on the 130 individuals dedicated to the agency lending business, the expertise of the broader Fidelity organisation and the relevance of our US$2.7 trillion in global assets (as of 30 June 2023) to proactively deliver to clients on matters influencing the SBL market and their programmes.
During market events, when clients and prospects look to their providers for market intelligence and guidance, we have seen the importance of this highly sophisticated and consultative approach. In these instances, lenders lean on our deep subject matter expertise at Fidelity Agency Lending to ensure accurate and informed decision making and correspondence with internal stakeholders and boards.
How are you responding to client appetite for more sophisticated performance measurement and attribution across their lending activities? What signals are you getting from the PB Optimize benchmarking tools regarding how service standards are evolving?
McCabe: Clients are looking for more than just performance benchmarking. They want tools that can measure their programme鈥檚 success across multiple providers, gauge missed opportunities and options for programme optimisation, and offer easy access to programme data and oversight.
With this in mind, Fidelity Agency Lending invested in PB Optimize, a value-added, fully integrated financial technology platform for our securities lending clients. Clients who lend with Fidelity or with other agents use PB Optimize to provide better governance and programme oversight and to make more informed decisions about their securities lending programme. One recent example is the predictive proxy screening tool that provides lenders with a consolidated view into holdings with upcoming record dates, a materiality score for the vote, whether shares are on loan, and what the missed revenue opportunity would be if it were to be recalled from loan. Clients are using this relevant view as the industry prepares for the new 色花堂and Exchange Commission requirements to Form NP-X.
What can we expect from Fidelity over the coming 12 months? And why should clients look to Fidelity for leading-edge securities financing solutions?
Fidelity is committed to continuing its investments in technology, talent and our positioning in the market. We are prepared and ready for the regulatory changes, including the move in the United States and Canada to a T+1 settlement cycle, enhancements to Form NP-X and 10c-1 reporting requirements. Fidelity Agency Lending will continue to engage with industry participants to explore how to improve and maximise lending opportunities across the lender-to-borrower regulatory capital landscape.
Specifically, we are positioned to grow and capture more market share as the anticipated Basel changes and capital constraints impact the way other agents can engage in the trade and optimise client performance. Market participants are responding to Fidelity Agency Lending鈥檚 ability to adapt quickly and react to client and borrower requirements and their desire for increased automation. This is aligned to our goal of positively impacting industry change, while helping our partners. Most of all, we look forward to meeting the challenges and opportunities that lie ahead.
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