Merging physical and synthetic finance: implementing change in technology and operations


NB: This article originally appeared on Securities Finance Monitor.

It seems that the era of mergers between physical and synthetic finance businesses is finally upon us. While client preferences may lean towards one type of trade vs. another, there is no question that regulation is the major driver of change. When faced with a request for a securities loan vs. a total return swap, the swap may be both easier and less capital intensive. In the long-term this will create broad-based new dynamics in financial markets. But in the short-term, our clients are working to manage complex implementation and technology changes.

Data has suggested for some years that synthetic finance and Delta One desks were building momentum. Analysis by Finadium shows synthetic financing revenues at an estimated US$7 billion for 2015 across nine leading prime brokers, a growth of 43% over 2012 figures. Physical financing revenues are estimated at $3.9 billion, just 61% of synthetic revenues. Physical revenues have also grown more slowly than synthetic, just 22% since 2012.

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