MICHAEL WRIGHT: Securities financing industry comes of age with growing international interest

It was an opportune moment for the securities finance and collateral management industry to gather in Cape Town in February for its annual conference. Change is coming our way, and the local industry must adapt if it is to realise its full potential. 

In May, North America will transition to a T+1 regime, in which securities and cash transactions will settle within one business day after the trade date, compared with the prevailing two-day standard. This will unleash greater market efficiencies and curtail settlement and counterparty risk.

However, the implications for the SA industry, where we are on T+3, are profound. Systems and processes must be capable of keeping up with the shorter settlement window to enable the SA industry to interact with this huge market. 

Technology is evolving at lightning speed, from distributed ledger technology and blockchain to artificial intelligence and software as a service, or cloud computing. These technologies hold the potential to transform our industry and open new pathways for growth, but they also come with risks that we must be careful to understand fully before adopting new ways of doing things. 

Being able to observe how other markets that are further down the track incorporate these technologies will help local players avoid some of the pitfalls. At the same time, the world is experiencing a period of heightened geopolitical tension and uncertainty. 

The effect of climate change is more evident every day, and the conference heard from futurist, economist and business trends analyst Bronwyn Williams how the Pacific nation of Tuvalu is creating virtual copies of its land to preserve it for future generations as the people of Tuvalu prepare for their islands to be submerged beneath a rising sea. 

The finance sector has a critical role to play in helping address climate change in the way that it manages capital. Appropriate regulation is a key enabler in all of this, and the evolution of regulation itself injects new dynamics into the market. Most importantly, as Financial Sector Conduct Authority (FSCA) divisional executive for market integrity & decisions sciences Olano Makhubela reminded the conference, regulation is not just about ticking boxes. It is about ensuring client satisfaction, fairness and transparency. 

He also elaborated on the role the FSCA will play in the sustainable finance and environmental, social and governance (ESG) paradigm shift, with a focus on taxonomy; enabling asset owners to positively influence the companies they invest in; consumer literacy; market development in areas such as carbon credits and green bonds; and disclosure and reporting. 

Sustainable finance is moving rapidly towards mainstream practice. Beyond the growing recognition that economic activity creates risks for the long-term continued development and sustainability of human society, we have also seen how markets can fail to adequately price in risks with a longer time horizon than that of most investments. 

ESG is evolving to allow investors to engage more systematically with such risks, as well as opportunities arising from emerging regulation that seeks to address them. A key question is the ability to benchmark and compare conventional risk-adjusted returns with those of ESG-compliant investments in the future. 

The securities finance industry has not been idly waiting for regulation to arrive. Through our representation on the Global Alliance of Securities Lending Associations, we have sought to resolve some of the most important issues relating to ESG, and especially governance, ahead of regulatory intervention. 

In the process we have created the Global Framework for ESG & Securities Lending, a guide to pension funds for making their securities lending programmes more ESG compliant. 

The recent 2024 Securities Finance & Collateral Management Conference witnessed a surge in attendance, with 30% more delegates compared with the previous year. Many of these were international visitors attending for the first time. The level of interest was evident in the exceptional quality of the speakers, as foreign guests also showed a strong appetite to participate in panel discussions rather than simply observing. 

The expansion of the conference to include collateral management, securities financing transactions and repurchase agreements demonstrates its commitment to fostering knowledge exchange and collaboration. Encouragingly, regulators, including the FSCA, Reserve Bank and SA Revenue Service, also actively participated in the conference. 

SA, as the largest securities lending market in Africa, boasts an average lendable value of R1.3-trillion, with lender-to-broker loan values reaching R137.6bn. While historically serving domestic needs (because of the regulatory environment, market infrastructure and overall economic landscape), there is now growing demand domestically and internationally for securities financing activities in SA. 

In this era of rapid change and global uncertainty, the SA securities finance industry is well positioned to develop and assert its rightful place in the global arena. 

• Wright is senior manager for securities lending at Nedbank Corporate & Investment Banking.