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


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.

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Business design

Are relationships still important in securities lending? (Premium Content)

Securities lending used to be a relationship driven business to the point where if you didn’t know someone, you could not borrow a security if the world depended on it. New forces have entered the market however and the old order has seen its influence reduced. We wonder though, how much has really changed vs. how is the status quo of the mid-2000s holding on? Here’s what we are seeing:

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Fed Governor Tarullo speaks on regulating insurers liability sensitive activities, including sec lending, repo, and collateral management

The theme this week has been regulators looking beyond the banks for risks to to the financial system. We saw the SEC take aim at mutual funds and ETFs with proposed rules to require investment managers to characterize how liquid are their assets. The FSB did something similar; examining (among other things) the potential mismatch between redemption terms and asset liquidity, leverage within funds and fund involvement in securities lending. Finally this week was a speech by Federal Reserve Governor Tarullo at the Banque de France Conference “Financial Regulation–Stability versus Uniformity; A Focus on Non-bank Actors”. The speech was called “Capital Regulation Across Financial Intermediaries” . One focus of the speech was on how some of insurance companies’ non-traditonal/non-insurance activity — sec lending, repo, and collateral management — is not adequately regulated. 

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