Financial organisations face a complex landscape when it comes to optimising capital efficiency, largely shaped by stringent regulatory frameworks and an intensely competitive market environment. Regulations including Basel III have significantly increased the capital requirements for firms, compelling them to maintain higher liquidity buffers and adhere to more rigorous risk management practices. 

While helping to ensure the stability of the financial system, these regulations also limit firms’ ability to leverage their capital for higher returns, in the process challenging traditional approaches to generating profits. Moreover, the need to comply with diverse regulatory standards across different jurisdictions adds to operational complexities and costs, further straining capital efficiency.

One innovative approach to enhancing capital efficiency is to combine stock lending with Total Return Swaps (TRS). There are numerous benefits to this approach. First, by using stock lending alongside TRS, firms can more effectively leverage their securities inventory. 

There’s also a benefit from a risk management perspective. Through TRS, sell-side firms can hedge their exposure to the lent-out securities. This can be particularly useful in volatile markets, where direct exposure to the asset might be riskier.

Bridging stock lending and TRS can also enhance liquidity. The approach achieves this by providing securities for short-sellers, and by leveraging TRS to provide firms with the economic benefits of holding securities without tying up as much capital.

Finally, integrating stock lending and TRS allows firms to diversify their revenue streams and drive operational efficiencies by reducing the need for multiple transactions and counterparties. This can lower transaction costs and streamline processes within the firm.

The challenge for firms is that TRS workflows can be extremely difficult to manage. In most organisations, communications with various counterparties and colleagues require using multiple workflows in parallel, each with their own protocols. Overall, trading processes remain overwhelmingly manual, using up precious time and increasing the risk of errors.

Organisations looking to develop a stock lending/TRS product therefore need to leverage advanced digital workflows. Solutions such as Wematch’s TRS module automate trade matching and collateral optimisation, reducing operational risks while dramatically increasing efficiency. We provide financial institutions with access to a community where traders can connect with counterparties through enhanced communication protocols, manage their books effectively and unlock the benefits of data-driven processes and insights. Significantly, as a cloud-based solution, Wematch helps users enhance their capital efficiency without the need for investments in expensive capital projects.

Finding the most effective way to free capital and put it to work remains a challenge for many firms. Those who embrace digital workflows to integrate stock lending and TRS will be best placed to overcome this challenge and boost the bottom line. 

To learn more about Wematch.live, please reach out.

Photo by Karsten Würth on Unsplash

The views and opinions expressed are for informational and educational purposes only as of the time of the writing/production and may change at any time. The material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.