Finadium: Securities Lending, Indemnification and Counterparties

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The securities lending market is changing at long last, and asset holders need to stay smart about managing risk and return in their programs. Some of these changes were long-expected, including the full pricing of capital charges for agent lenders and bank borrowers. Others are new, including lending directly to hedge funds. A new report from Finadium explores these topics and provides an action item checklist for asset holders.

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DataLend: Top global trends in securities lending in 2016

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The securities finance business is off to a strong start in 2016. DataLend has seen a substantial increase in on-loan values from the beginning of this year. January saw the lender-to-broker on-loan balances of approximately $1.65 trillion. That has grown to almost $1.85 trillion as of today. Broker-to-broker on-loan balances have also increased from about $236 billion in early January to around $262 billion today. These on-loan value increases mirror an uptick in global fees to borrow across all asset classes, which have risen from 45 basis points (bps) in early January to almost 50 bps today. The increase in on-loan values is also reflected in global utilization, which has risen from 12% in January to almost 14% today.

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ISLA March 2016 Securities Lending Report now online

Our first ISLA Securities Lending Report was published in October 2014 as part of our drive to promote greater and more consistent transparency across securities lending markets. In this, our fourth report, we continue to develop the theme of transparency as part of those original objectives but we have also begun to explore where the securities lending markets may change and evolve as many of the regulatory initiatives across Europe move into legislation. We believe that as part of a broader transparency debate it is important to recognise the role of securities lending in the context of the broader capital markets and real economy and we therefore welcome recent dialogue around the Capital Markets Union.

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OFR starts a securities lending data gathering pilot project. Where will this leave the data vendors?

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In an expected move, the US Office of Financial Research announced today that they would begin gathering securities lending data in a pilot project. While not an immediate threat, the collection project is expected to grow to the point where OFR can produce robust statistics. Where does this leave RMA, Markit Securities Finance, DataLend and FIS Astec Analytics?

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Mid-tier banks are facing unique challenges in securities finance technology and business models

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In our recent survey of banks on securities finance technology we found that mid-tier banks are facing some particular challenges not shared by their large or small competitors. There are clear indications that mid-sized firms have some very different strategic and technology priorities than either smaller or larger firms – in some cases, dramatically different.

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SEC finding on Goldman Sachs’ Reg SHO locates highlights process and procedure gaps

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In January, the Securities and Exchange Commission (SEC) enforcement division issued a press release that all broker dealers should review. The enforcement action was related to procedural and technical violations of the Reg SHO locate requirement at Goldman Sachs. Three aspects of the finding are important for other firms, and should prompt internal examinations around their own procedures and technology.

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Why direct repo and securities lending may be the best thing that has happened for asset holders in a long while (Premium)

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There is a sea change coming to the market in direct repo and securities lending, at least for many firms that want to continue to earn reliable revenues. The term “direct” is a bit of a misnomer, and the idea of lending to the credit exposure of a hedge fund is certainly not the first thing that asset holders get excited about. But as we further analyze the subject, we think that direct might lead to a major breakthrough for asset holders in both revenue generation and risk management. Here’s the argument:

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Resilience and opportunity in the securities lending market

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Interest rates across Europe are widely expected to stay low for the foreseeable future, with even the possibility of further easing on the horizon, as the ECB asset purchase programmes gather pace into 2017. Consequently, both buy-side and sell-side institutions are feeling the impact of evolving regulatory and market context, as investors are taking great care to review the options available to them when creating a securities lending programme that matches both their performance objectives and risk/reward profile. In light of these market dynamics, we take a look at a few key areas that investors are evaluating when designing their securities lending programme.

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Finadium report: ETF Risk in the New Regulatory Environment

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A new Finadium report looks at liquidity and operational risk in the ETF market given recent changes in underlying market liquidity and volatility, as well as regulatory concerns about fire-sale risk. We explore how market participants can work together in solving some of the complex market structure problems that have arisen in the current environment.

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The highs and lows of IMN’s 2016 US beneficial owners in securities lending conference (Premium)

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We attended IMN’s beneficial owners in securities lending conference last week in Phoenix, Arizona. The conference was well attended, with an estimated 60 beneficial owners present and some 200 vendors. There were some interesting things said along with some mis-cues. The biggest hanging question was: where is this event heading? Our review is below.

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Securities Lending in 2016: Challenges and Opportunities for Agent Lenders

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The nature of agency lending is changing along with financial markets in the post-Global Financial Crisis era. Agent lenders have become more responsive to their clients, as well as to the needs of their counterparties in the face of complex regulatory requirements. Some institutions view 2016 as an uncertain time for their agency programs, while others have doubled their commitments to the business. At BNP Paribas, we see a great future for our clients and our agency lending program, and we are paying careful attention to the exceptional markets and regulatory context to maintain a successful outcome.

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Optimizing securities lending collateral management across cash and non-cash

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The impact of regulations on the securities lending industry has been frequent and profound, but the market remains vibrant. Volumes decreased in 2015 for the first time since the Global Financial Crisis although they remain near post-2008 highs. Growth in two key areas demonstrate the market’s adaptability: transactions backed by non-cash collateral have increased steadily since 2008 and direct lending is slowly growing between borrowers and lenders without an intermediary bank. With more regulations coming online in the near future, including the Financial Stability Board’s new margin rules, firms are well-placed to scrutinize available strategies in a bid to optimize returns.

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EquiLend NGT: a case study with user feedback

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EquiLend’s NGT (Next Generation Trading) platform is emerging as an important new trading platform in the securities finance markets. With NGT at the early stages of adoption, Finadium conducted interviews with EquiLend and initial users to understand the value of the platform and determine what benefits may emerge as the network grows.

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Great FT article on seclending but Finadium data were misquoted the first time around

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We thank the Financial Times for their article, “Securities lending unsettles regulators,” by Chris Flood. The article was published on Jan 10 2016 and highlights the importance of securities lending as a means of improving market liquidity. We were accurately quoted on our opinions but our data were misquoted in the original print and online editions (but have subsequently been corrected online).

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The DTCC old stock borrow program could be a solution to new capital problems (Premium)

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What if there was a centrally cleared facility through a US Central Securities Depository (CSD) that would automatically allow a broker with excess availability to lend securities to another broker with a need for those securities? What if that facility was fully automated and ensured each party was wholly collateralized every business day, and which substantially eliminated problems like Rule 204 fails?

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Fully Paid Lending meets enterprise technology and operations (Premium)

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Fully Paid Lending (FPL) programs touch nearly every major trading, operational, compliance and administrative business process at a broker. Putting an FPL program in place does as much as any other project to expose just how “enterprise ready” (or not) a broker’s securities lending systems and operational model really are.

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Big Data comes to Securities Finance

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Big Data has taken over retailers, governments and social media, and it is now coming to securities finance. Securities finance has always had to contend with a substantial amount of data, but Big Data presents a new and emerging complication. The change ahead of us is how much more data is created, how much further data needs to travel, and what else needs to done with it. This is where Big Data really earns its name.

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Finadium: Regulatory Costs of OTC Derivatives vs. Securities Finance Transactions

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This Finadium report evaluates regulatory costs in order to determine whether internal balance sheet treatment will push the market towards OTC derivatives in place of Securities Finance Transactions (SFTs, including securities loans and repo). We already observe this happening in securities lending and ask whether evolving regulations will speed the market in this direction.

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LCR, NSFR, HQLA? The technical reasons for why that FT article was off base

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Following the publication of the FT’s article on November 30, “Regulators’ boost for securities lending has risky implications,” and our reply, “The FT suggests that collateral transformations amount to regulatory arbitrage,” readers provided some very constructive comments. One thing they asked about was a part of the analysis that we hadn’t fully wrapped up: what happens to LCR calculations in a collateral transformation?

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Free from Finadium: Securities Lending, Market Liquidity and Retirement Savings: The Real World Impact

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This paper looks at the contributions of securities lending to financial markets with an emphasis on transaction costs, market liquidity and incremental revenue. We identify US$61 billion in increased annual investor costs that would result from a loss of securities loans on major international equity markets if securities loans, and hence short selling, were no longer available. This report is available for free download courtesy of State Street.

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An analysis of the BCBS consultation paper “Haircut floors for non-centrally cleared securities financing transactions” (Premium Content)

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The Basel Committee on Banking Supervision (BCBS) has released a consultation document that looks to operationalize what we’ve seen previously from the Financial Stability Board on haircuts for Securities Finance Transactions (SFTs). We provide a read-through of the document and highlight some areas we see as possible concerns.

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Event recaps from London and Zurich (Premium Content)

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We return to the US this week after two successful events in London and Zurich, covering collateral, funding, securities lending and repo. Here’s what we learned, combining findings from both locations.

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With non-cash trades on the rise, will indemnification become an issue for sec lending agents?

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The cost and availability of indemnification of beneficial owners by securities lenders is a perennial topic at conferences. But it is not clear that the dire warnings about cost and availability have really come to pass. There is a developing trend in sec lending that could change all this. It is the shift toward more non-cash collateral. These trades absorb more RWA (than cash collateralized deals) and could put agent indemnification into play.

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Finadium: Asset Managers and the Uses of Collateral

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Finadium has released a new research report, “Asset Managers and the Uses of Collateral in OTC Derivatives, Securities Lending and Repo: A Finadium Survey.” This report looks at the progress made by fund managers and insurance companies in preparing for a future landscape where collateral may be in short supply, and cross-asset collateral management is a requirement.

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

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

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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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Finadium: Can the Blockchain Work for Securities Finance, OTC Derivatives and Other Collateralized Transactions?

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Finadium has released a new research report on blockchain, a potentially exciting new technology in financial markets. Blockchain promises to be revolutionary, disruptive and a way to fundamentally change financial services. While proponents may be correct about the technologyʼs potential, the buzz can be confusing; how much of the publicity is hype versus reality for collateralized trading markets including securities finance and OTC derivatives? We offer a practical look at how blockchain could be implemented across complex capital market activities including liquidity and capital management.

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What’s Next for Securities Finance Technology Vendors?

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The dizzying array of new regulation in financial markets is forcing change on all market participants. Securities technology vendors that think through not only today’s challenges but also tomorrow’s are best positioned as key partners for their bank and brokerage clients.

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What to make of the OFR report on securities lending and repo (Premium Content)

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The US Office of Financial Research (OFR), created as part of Dodd-Frank and tasked with organizing and analyzing data on financial markets and systemic risk, has published “Reference Guide to U.S. Repo and Securities Lending Markets.” What, if anything, does this paper signify for market participants? Should we care? Our article demystifies both the report and an associated blog post, which itself is entitled “Demystifying U.S. Repo and Securities Lending Markets.”

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A buy-side cost/benefit analysis for securities lending CCPs

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A recent survey of asset managers in securities lending showed that executives were interested in CCPs but lacked the information necessary to create a cost/benefit analysis and build their business cases. Part of this business case relies on data from a functional CCP, but other parts require an understanding of the main components. This article provides key points and a methodology for creating this analysis.

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