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The Path to Alpha: An Integrated Securities Finance Strategy

Upgrading to a centralized data platform that provides real-time views can empower investors to leverage their assets and seize new opportunities to boost portfolio returns.

As seen in Institutional Investor, February 2022

There are multiple pressures today on institutional investors to enhance alpha generation, and no shortage of stand-alone solutions. But firms that use a holistic approach to their financing, liquidity and collateral needs are best positioned to optimize their portfolios for greater revenue potential and higher returns. Given this, it’s not surprising that firms are increasingly upgrading their securities finance strategies to incorporate integrated frameworks that allow the collective leveraging of their assets while improving control and monitoring. We asked two Northern Trust experts – Judson Baker, Securities Finance and Collateral Product Manager, and Mark Jones, Head of Securities Finance for Europe, the Middle East, and Africa (EMEA) – how sophisticated investors can best implement an effective, securities finance strategy to boost their portfolio performance.


How do you define an integrated securities finance framework?

Mark Jones: At the highest level, an integrated securities finance framework allows buy-side firms to make the best decisions on utilizing their assets to achieve specific goals. By thinking holistically about financing and liquidity products, such as securities lending, borrowing, repo, collateral management and cash products, firms with a mandate to make risk-based decisions on optimal use of their portfolio are better able to identify and execute opportunities.

Judson Baker: To add to what Mark said, as an asset servicer, there have been many times that we have seen firms want to use the same asset for two different purposes, for example, their collateral department pledging out a security only to find that the same security was just repo’ed out for cash. They then must scramble to find a different security. Upgrading to an integrated securities finance framework allows firms to coordinate their assets and optimize usage for the same asset pool.

A successful integrated securities finance framework starts with two critical features: inventory aggregation of assets, and real-time access to an updated, refreshed view of that inventory.

First, firms need to aggregate their asset pool into a centralized place that's accessible to everyone, removing silos or barriers. Secondly, they need a platform that provides a real-time reflection of those assets because, with different parts of an organization tapping into a central asset pool, latency in data updates can cause problems. That is a critical foundation to being able to maximize alpha.

What market forces are most driving firms to make their securities finance strategies more effective?

Judson Baker: From a buy-side perspective, the two most influential drivers are the increase in regulatory requirements and mounting pressures for firms to seek greater returns for their asset pools to generate alpha.

The derivatives space offers a great example regarding regulatory drivers. In September 2021, the fifth phase of the Uncleared Margin Rules (or UMR) became effective.  This was a new requirement forcing several hundred firms to set aside more capital or pledge more assets to meet the margin obligations of their derivative trading portfolios. As we look forward to September 2022, the sixth and final phase of UMR becomes effective and is anticipated to impact nearly a thousand firms globally. In order to be able to set aside more capital, firms will want to be sure they are maximizing their assets, which is what an effective securities financing strategy can help them do.

Banking regulations offer another clear example of how regulatory issues influence this space; each bank has its own liquidity ratios, leverage ratios, capital reserves and so forth that it must follow. Investors want to be sure they can meet each of these requirements and need to evolve their finance strategies to meet the changing regulatory environment.

Mark Jones: Regarding the shift toward chasing alpha, more firms are trying to squeeze as much revenue out of their portfolios as possible. Many of our clients use a buy-and-hold strategy that has their securities sitting on the sidelines. How can they leverage that asset pool to generate revenue? Traditionally, most have used securities lending, and Northern Trust can facilitate those lending arrangements with broker-dealers who need to borrow securities. But we can also provide other services to help institutions seek alpha from their assets. Enabling repo clearing in the U.S. for eligible U.S. domiciled clients, for example, or aiding disintermediation – these are just two of many services we offer clients.

Can you say a little more about disintermediation?

Mark Jones: Certainly. Disintermediation – or when firms trade directly with each other instead of using an intermediary – is another trend driving the growing need for stronger securities finance strategies. In the past, most of the liquidity was between firms tapping into just a small group of broker-dealers, including large banks and prime brokers. But the trend of firms trading amongst themselves has been growing stronger for the last couple of years, and that’s compressing margins since there is no longer a broker arrangement. That said, peer-to-peer trading can be difficult, and firms need a party to bring those entities together and handle the administrative tasks and other important functions through the trade life cycle. Northern Trust helps many institutional investors use disintermediation effectively and we serve as a key player in their trading relationships.

What key challenges and hurdles are many institutional investors dealing with in improving their securities finance capabilities?

Judson Baker: Breaking down the historic silos inside their firms is one of the biggest hurdles that organizations face in creating a modern securities finance framework. If you think of a typical pension fund that doesn't manage their investments in house, they have multiple asset managers, each with different mandates. This makes it more difficult to leverage their securities with a collective strategy. While seeing the big picture has been historically challenging for many firms, advances in technology – and growing market awareness – are changing this.  Consider this a step beyond the traditional overlay strategy.

Mark Jones: Technology is key to connecting the dots. The silos that Judson references are much more easily dismantled with a strong, integrated technology platform. It can be a challenge to link legacy platforms together, but the technology is available and by connecting development closely with business objectives, it is possible to make incremental jumps forward without “big bang” implementations.

As a provider we are evolving our platforms to help our clients link their activity without requiring a big build on their side. Along with our ability to provide expertise and operational support, we can help minimize the cost and effort required to realize the benefits of a strategically optimized securities finance approach.

How can Northern Trust help institutional investors create and implement a modern securities finance framework?

Judson Baker: We’re strongly positioned to help large investors achieve those critical first steps of inventory aggregation and  data access. We’re the centralized holder of our clients’ assets, and we offer a breadth of services spanning from custody servicing to integrated trading solutions to outsourcing aspects like collateral management. Our Securities Finance offering provides a suite of integrated capabilities across securities lending and borrowing, financing and liquidity and collateral solutions.

One of our main goals as an asset servicing provider is to stay close to our clients. If there are trading opportunities for them available in the street, we can  help them execute those trades. As just one example, we have connectivity with all major clearing brokers, and having that infrastructure already in place is a significant advantage for our clients.


This marketing communication is issued and approved for distribution in the United Kingdom and European Economic Area by The Northern Trust Company, London Branch (‘TNTC’) or Northern Trust Global Services SE (‘NTGS SE’). TNTC is authorised and regulated by the Federal Reserve Board; authorised by the Prudential Regulation Authority; subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. NTGS SE is authorised by the European Central Bank and subject to the prudential supervision of the European Central Bank and the Luxembourg Commission de Surveillance du Secteur Financier. View full disclaimer.

Judson Baker

Securities Finance and Collateral Product Manager

Mark Jones

Head of Securities Finance, EMEA

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