February 2017

The securities lending industry has navigated choppy waters in the last few years, with regulatory change looking to challenge the incremental income generated off securities on loan. Today, the industry is more forward looking and is coming up with new ways to innovate rather than stagnate from the impasse of the many unknowns.

At the Annual Beneficial Owners’ International Securities Finance & Collateral Management conference in Fort Lauderdale, Florida, clear trends emerged to indicate clearer skies.

An industry with a road map

With the long awaited arrival of new regulations, the industry has moved away from the ‘wait and see’ mentality and into solutions mode to address the challenges. Success in the new environment will be borne out of collaboration between agents, beneficial owners and both traditional and non-traditional counterparties. Tim Smollen, Head of Agency Securities Lending at Deutsche Bank notes that “due to increased regulatory costs, transacting with non-traditional counterparties is starting to move into the mainstream. Instead of trading solely with traditional broker dealers who are hampered by balance sheet pressures, peer to peer transactions with insurers and money market funds, for example, are a means of achieving client objectives in an innovative way”.

Coming out of 2008 financial crisis, agent lenders’ roles too have changed. Following that, some became intrinsic value lenders focused on risks. Now, in order to get the flow of collateral and cash moving at minimal cost, the business is becoming increasingly structured insofar as agent lenders are required to examine each trade relative to the resulting regulatory costs when putting together transactions between specific counterparties and various client types.

“Agents have to consider the balance sheet cost incurred by counterparties when putting trades together”, notes Smollen, who was featured session titled An Audience with Agent Lenders – Innovation & Critical Issues.

New players in the mix

Joseph Santoro, Head of Product Sales for the Americas – Agency Securities Lending at Deutsche Bank, notes from a regulatory capital perspective, it is less onerous for broker dealers to trade with certain types of beneficial owners, both in securities lending and reinvestments in repo. “At the same time, the needs of beneficial owners is evolving beyond generating incremental returns. In our view, securities lending is becoming increasingly important as a financing, collateral and liquidity solution. Certainly, peer to peer transactions with institutional investors on both sides of the trade will be part of the solution,” he noted.

No place was this trend more pronounced than at the conference, which brought together traditional industry practitioners as well as emerging peer to peer lenders, and was highlighted by Anthony Toscano, Head of US Trading & Risk Management, in a session titled Exploring Innovative Uses of Securities Lending; Cash Collateral; & Alternative Routes to Market for Creative Revenue Enhancement & Collateral Optimisation.
“Where there’s a vacuum something will enter to fill it. It’s about finding solutions that reduce regulatory costs and solve needs on all sides of a trade,” adds Santoro.

Evolving CCP model

While new providers and new products are entering the frame, CCPs are also stepping up their game. Historically the advent of the securities lending CCPs meant lower costs. However they didn’t fit the agency model in terms of access to the CCP and margining. These CCPs have therefore been tweaking their pending products to make them more compatible with agent lenders. A developing CCP in Europe is working on how that mechanism will look and operate. Currently the model being considered is similar to a triparty repo whereby lenders would select their counterparties and won’t need to post collateral.

In summary, the conference had one clear message for securities lending in 2017: the traditional securities lending model is seeing a new dawn of innovation. It is fast moving from something that was geared toward incremental revenue generation and is now also synonymous with financing and repo, where beneficial owners can use wider market place of participants to seamlessly move between those activities.

And providers should adapt to lead the innovation charge. As an example, in the newly published Global Investor ISF Beneficial Owners Survey 2017, Deutsche Bank is ranked as the most innovative lender by the largest number of beneficial owners in the Americas. Through its “one bank” philosophy, Deutsche Bank brings together its partners in prime brokerage, asset management and agency securities lending to support clients in getting the flow of collateral and cash moving at minimal cost.

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