Unlocking value: How transparency and balance sheet optimisation are transforming securities finance
16 September 2025
Only when clients have a clear and detailed understanding of their performance drivers, inefficiencies, and opportunities, can they effectively start to optimise, explores State Street鈥檚 Rupsha Roy, vice president and head of Financing Hub product
Image: stock.adobe.com/arsyi_06
The evolving landscape of securities finance and prime brokerage is increasingly defined by three converging client priorities: transparency through advanced data analytics, balance sheet optimisation, and efficient return generation.
Market participants 鈥� from asset owners to hedge funds and broker-dealers 鈥� are demanding more clarity and precision from their financing relationships as regulatory, cost, and competitive pressures continue to reshape the industry. They now expect near real-time visibility into financing costs, collateral allocation, liquidity usage, and counterparty exposures.
State Street has a long history of launching innovative and balance sheet friendly solutions in securities financing, such as sponsored cleared repo and direct access lending. We are now launching Financing Hub, a modular technology solution for buy side clients providing data and intelligence tools to meet the increasingly complex needs of our lending and financing clients.
Transparency and data analytics
Transparency requires more than a mass of reports; to effectively utilise their data, market participants need tools that help make sense of it. More specifically, they want deeper insights into how their trades influence their own and their counterparties鈥� balance sheet usage, the cost of their collateral allocation, and their risk profile. For example:
鈥� What are precise trade-offs of entering into a cash loan versus a total return swap with regards to financing spreads and margin interest?
鈥� What is an optimal allocation of collateral, given the assets鈥� balance sheet consumption and opportunity cost?
鈥� What are the drivers of gains or losses across market moves, financing terms, etc.?
A legacy approach using static reporting is no longer sufficient to meet these current business needs. Instead, clients increasingly require a deeper and more granular understanding of their performance drivers. This includes trade-level cash flows, collateral requirements, margin drag, and netting opportunities. Tools to interpret this data enable clients to view high-level risk and return metrics on their portfolio, as well as the ability to drill-down into further details such as regional risk and returns and factors like portfolio tilts and beta.
Performance can be segmented into idiosyncratic stock selection, market return, and broad macro factors and, ultimately, clients can better gauge how 鈥榗lean鈥� their alpha is. Only when clients have a clear and detailed understanding of their performance drivers, inefficiencies, and opportunities can they effectively start to optimise.
Balance sheet optimisation and efficient return
Dealers and banks are focused on generating efficient returns relative to risk-weighted assets (RWA). With Basel III Endgame reforms, the US 糖心vlog and Exchange Commission鈥檚 (SEC鈥檚) proposed changes to Treasury clearing, and regional capital frameworks raising the cost of balance sheet usage, the key is using the balance sheet optimally to ensure high return on capital (ROC) trades.
For buy side clients, the implication is clear: trade structuring directly impacts pricing and capacity. For example, a manager choosing between financing its long book via cash margin loans or synthetics may see materially different costs due to the RWA impact on the dealer鈥檚 balance sheet.
In response, the industry is moving toward relative returns. Profitability is evaluated in relation to its efficiency. Recognising the correlation between dealer balance sheet impact and pricing, buy side institutions are increasingly focused on managing their balance sheet footprint for a competitive advantage. To support these efforts, intermediaries such as State Street have developed and are deploying sophisticated allocation models to steer clients toward structures that improve economics of the trade.
As regulatory pressures grow, unlocking capital efficiency across various participants is set to expand. Centrally cleared trades are a fast-growing tool for dealers to unlock capital efficiency. Sponsored repo is reshaping securities financing. In this model, dealers such as State Street, currently a member of Fixed Income Clearing Corporation (FICC) and soon-to-be member of central clearing counterparties (CCPs) such as Eurex, sponsor clients into centrally cleared repo with CCPs.
Dealers, who previously shouldered bilateral positions on both sides of the matched book repo, can now novate it to FICC. This reduces RWA and leverage ratio pressures. Buy side clients benefit from lower margin requirements and better financing rates as dealers potentially pass on capital saving from netting at the CCP.
In a move reflecting the growing sophistication of securities finance, asset owners, and managers are also pairing securities lending with selective collateral pledge models to optimise RWA for their borrowing clients. Custody Margining is one such example.
The lender (beneficial owner) pledges a pool of high-quality securities to the borrower. This is administered and serviced by agent lenders such as State Street by holding the pledgedsecurities either in a segregated account or the lender鈥檚 custody account.
For the borrower, the pledge reduces its net credit exposure to the lender. This allows the borrower to hold less capital against the exposure, resulting in RWA savings. The lender benefits from enhanced attractiveness of their lending programmes. Driven by lower balance sheet usage, borrowers are now incentivised to engage on better terms, potentially allowing the lender to capture improved lending fees.
In addition to improving trade terms through more efficient use of dealers鈥� balance sheets, buy side funds are also looking to optimise their own balance sheets, efficiently putting their assets to work in order to manage risk and liquidity and generate alpha.
This has led to a focus on quantitative optimisation tools 鈥� from collateral optimisation to what-if type scenario analysis, as these firms seek insight into return generation relative to resource allocation. These tools help to address the important question of how best to deploy tight balance sheets to maximise returns while managing regulatory constraints.
A robust balance sheet optimisation framework allows clients to realise maximum value from their inventory by freeing up highly-quality liquid assets (HQLA), such as US Treasuries, through cheapest to deliver, identifying collateral transformation opportunities and ensuring securities with inherent demand are identified and put to work to generate revenue through lending.
Finally, transparency, balance sheet optimisation and efficient returns are not separate demands, but are mutually dependent.
Transparency requires data. Optimisation requires transparency into costs and constraints. And analytics is the framework that makes both actionable.
State Street is committed to supporting and partnering with our clients on their evolving journey to unlocking the full value of their balance sheet.
As a global custodian, asset servicing provider and financing solutions partner, we are uniquely positioned to service this entire ecosystem providing valuable data and insights to our clients building on over 40 years of expertise as a leader in the securities financing business.
Market participants 鈥� from asset owners to hedge funds and broker-dealers 鈥� are demanding more clarity and precision from their financing relationships as regulatory, cost, and competitive pressures continue to reshape the industry. They now expect near real-time visibility into financing costs, collateral allocation, liquidity usage, and counterparty exposures.
State Street has a long history of launching innovative and balance sheet friendly solutions in securities financing, such as sponsored cleared repo and direct access lending. We are now launching Financing Hub, a modular technology solution for buy side clients providing data and intelligence tools to meet the increasingly complex needs of our lending and financing clients.
Transparency and data analytics
Transparency requires more than a mass of reports; to effectively utilise their data, market participants need tools that help make sense of it. More specifically, they want deeper insights into how their trades influence their own and their counterparties鈥� balance sheet usage, the cost of their collateral allocation, and their risk profile. For example:
鈥� What are precise trade-offs of entering into a cash loan versus a total return swap with regards to financing spreads and margin interest?
鈥� What is an optimal allocation of collateral, given the assets鈥� balance sheet consumption and opportunity cost?
鈥� What are the drivers of gains or losses across market moves, financing terms, etc.?
A legacy approach using static reporting is no longer sufficient to meet these current business needs. Instead, clients increasingly require a deeper and more granular understanding of their performance drivers. This includes trade-level cash flows, collateral requirements, margin drag, and netting opportunities. Tools to interpret this data enable clients to view high-level risk and return metrics on their portfolio, as well as the ability to drill-down into further details such as regional risk and returns and factors like portfolio tilts and beta.
Performance can be segmented into idiosyncratic stock selection, market return, and broad macro factors and, ultimately, clients can better gauge how 鈥榗lean鈥� their alpha is. Only when clients have a clear and detailed understanding of their performance drivers, inefficiencies, and opportunities can they effectively start to optimise.
Balance sheet optimisation and efficient return
Dealers and banks are focused on generating efficient returns relative to risk-weighted assets (RWA). With Basel III Endgame reforms, the US 糖心vlog and Exchange Commission鈥檚 (SEC鈥檚) proposed changes to Treasury clearing, and regional capital frameworks raising the cost of balance sheet usage, the key is using the balance sheet optimally to ensure high return on capital (ROC) trades.
For buy side clients, the implication is clear: trade structuring directly impacts pricing and capacity. For example, a manager choosing between financing its long book via cash margin loans or synthetics may see materially different costs due to the RWA impact on the dealer鈥檚 balance sheet.
In response, the industry is moving toward relative returns. Profitability is evaluated in relation to its efficiency. Recognising the correlation between dealer balance sheet impact and pricing, buy side institutions are increasingly focused on managing their balance sheet footprint for a competitive advantage. To support these efforts, intermediaries such as State Street have developed and are deploying sophisticated allocation models to steer clients toward structures that improve economics of the trade.
As regulatory pressures grow, unlocking capital efficiency across various participants is set to expand. Centrally cleared trades are a fast-growing tool for dealers to unlock capital efficiency. Sponsored repo is reshaping securities financing. In this model, dealers such as State Street, currently a member of Fixed Income Clearing Corporation (FICC) and soon-to-be member of central clearing counterparties (CCPs) such as Eurex, sponsor clients into centrally cleared repo with CCPs.
Dealers, who previously shouldered bilateral positions on both sides of the matched book repo, can now novate it to FICC. This reduces RWA and leverage ratio pressures. Buy side clients benefit from lower margin requirements and better financing rates as dealers potentially pass on capital saving from netting at the CCP.
In a move reflecting the growing sophistication of securities finance, asset owners, and managers are also pairing securities lending with selective collateral pledge models to optimise RWA for their borrowing clients. Custody Margining is one such example.
The lender (beneficial owner) pledges a pool of high-quality securities to the borrower. This is administered and serviced by agent lenders such as State Street by holding the pledgedsecurities either in a segregated account or the lender鈥檚 custody account.
For the borrower, the pledge reduces its net credit exposure to the lender. This allows the borrower to hold less capital against the exposure, resulting in RWA savings. The lender benefits from enhanced attractiveness of their lending programmes. Driven by lower balance sheet usage, borrowers are now incentivised to engage on better terms, potentially allowing the lender to capture improved lending fees.
In addition to improving trade terms through more efficient use of dealers鈥� balance sheets, buy side funds are also looking to optimise their own balance sheets, efficiently putting their assets to work in order to manage risk and liquidity and generate alpha.
This has led to a focus on quantitative optimisation tools 鈥� from collateral optimisation to what-if type scenario analysis, as these firms seek insight into return generation relative to resource allocation. These tools help to address the important question of how best to deploy tight balance sheets to maximise returns while managing regulatory constraints.
A robust balance sheet optimisation framework allows clients to realise maximum value from their inventory by freeing up highly-quality liquid assets (HQLA), such as US Treasuries, through cheapest to deliver, identifying collateral transformation opportunities and ensuring securities with inherent demand are identified and put to work to generate revenue through lending.
Finally, transparency, balance sheet optimisation and efficient returns are not separate demands, but are mutually dependent.
Transparency requires data. Optimisation requires transparency into costs and constraints. And analytics is the framework that makes both actionable.
State Street is committed to supporting and partnering with our clients on their evolving journey to unlocking the full value of their balance sheet.
As a global custodian, asset servicing provider and financing solutions partner, we are uniquely positioned to service this entire ecosystem providing valuable data and insights to our clients building on over 40 years of expertise as a leader in the securities financing business.
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