US SOLUTION SPOTLIGHT

Loanet's New Street-Wide Contract Consolidation Service Will Help Reduce Operational Costs

The U.S. securities finance industry has experienced unprecedented growth in transaction volumes. Services, such as Loanet's Order Routing, have automated trade origination and negotiation and have enabled the industry to increase its ability to borrow and lend securities in a more efficient manner and move closer towards full straight-through processing. Open positions have grown accordingly, and with them, so have the associated expenses of monitoring, collateralizing and processing related transactions.

Consolidating or condensing the number of open contracts between borrowers and lenders is an important way to reduce expenses and improve overall profitability. However, the high level of straight-through processing and automation in the US market creates a number of challenges to consolidating open contracts. Different types of industry participants have varying requirements for identifying potential consolidation opportunities, as well as different processing needs in order to maintain the integrity of their books and records, the accuracy of their regulatory reports, and their systems automation. Clearly, any automated initiative in this direction must accommodate these varying requirements in order to succeed.

Solution Working Group Determines Requirements

After forming a working committee of customers and SunGard securities finance representatives, business requirements were defined for an automated solution; the Loanet Street-Wide Contract Consolidation service. A fundamental requirement for a contract consolidation capability is the ability to fully integrate the process with customers' accounting and bookkeeping. It must also be timely in order to meet end of day bookkeeping and reporting, as well as open of business processing needs.

All members of the working group agreed that any automated solution must also allow major lenders with their own internal systems to participate, as the largest volume of business exists between broker-dealers and agent lending banks. Further, the contract consolidation capability must not preclude the processing of Loanet Automated Marks against the consolidated positions, as this would create an unacceptable level of mark-to-market exposure. Therefore, contract consolidation must occur on a fully compared basis to prevent lot differences between borrowers and lenders.

In addition, consideration must be given to broker-dealers' Month-end Capital and FOCUS reporting, which affects the periods in which consolidation can occur. Lastly, the automated solution must be sufficiently flexible to ensure that one party cannot dictate the terms of consolidation without the agreement of the other party.

Leveraging Proven Processes and Integration

The Loanet Street-Wide Contract Consolidation service uses consolidation based on Loanet's Contract Comparison service, which is used in the U.S. by more than 125 firms. By utilizing this existing infrastructure, firms can implement Street-Wide Contract Consolidation with their contract comparison contra parties through a centralized mechanism without the need for custom development.

In addition, Loanet Street-Wide Contract Consolidation is fully integrated with Loanet Automated Marks, and for Full Service Accounting customers, Consolidation will be integral to existing Loanet settlement automation and matching as well as back-office and bookkeeping interfaces. For Select Service clients Consolidation will be available as part of the U.S. Contract Comparison service, and will provide added value and reduced costs.

How It Works

The Loanet Street-Wide Contract Consolidation process applies system- and client-configurable selection or exclusion rules to open contracts identifying the pool of contracts eligible for consolidation. The system then compares your pool of eligible contracts to your contra party's pool of eligible contracts to find consolidation matches. Contracts are then consolidated based on the results rules you have agreed upon with your contra party. Output files from consolidation are then generated to update each participant's books and records.

Establishing Rules Specific to Your Business

Loanet Street-Wide Contract Consolidation is a rules-based system that includes system, firm and contra party level parameters. It allows each customer to establish rules applicable to their specific business requirements, and automatically identifies agreed-upon consolidation opportunities between the borrower and the lender based on their common rules.

Reducing Operational Costs

To date, increases in volumes have been something of a double-edged sword, in that the potential for increased revenues have brought with them increased operational costs, not only for settlement, but also in the cost of managing the transactions throughout the trade lifecycle. Contract consolidation reduces the number of transactions, and therefore helps hold down costs, both internally and externally.