2014 was a very active year for securities lending. A dizzying array of new regulations were proposed, discussed and evaluated; counterparty indemnification and margin rules dominated the debate. CCPs began to expand, with at least one CCP now able to accept buy-side market participants directly. Overall securities lending volumes declined while Asian volumes rose. This article takes a look at some of the main takeaways from the securities lending industry in 2014, and then a look at what’s ahead in the coming year.
A new report from Finadium looks at what netting rules are most important for the buy-side, including hedge funds, asset managers and institutional investors, as they work to best position themselves with bank and broker counterparties.
The Finadium Big Ideas Quarterly provides a summary of recent research, our upcoming report schedule and useful news.
The last day of conference sessions are not as well attended as the earlier ones, but that doesn’t mean there isn’t some interesting information. At the IMN Beneficial Owners Conference in San Francisco last week, one panel of predominately securities lenders was asked to predict the future shape of the business.
Clearstream held its 19th annual Global Securities Finance Summit in Luxembourg last week. Once again it was a huge event with some 850 registrants. There were some important takeaways in both what was said and what was not said. Here are our highlights.
During the CCP panel at the IMN Beneficial Owners Conference in San Francisco (which I moderated), there was an unspoken message: how do we break the news that eventually using CCPs may not be optional?
The Fed has published a staff report on the emergence of new banks that is sure to confound and distress some market participants. In the report, “Hybrid Intermediaries“, author Nicola Cetorelli argues that some of today’s nonbank intermediaries look very similar to earlier nonbank conglomerates that have become banks post-Lehman. BlackRock in securities lending is cited as an example. The subtext argument here is whether BlackRock and firms like it are SIFIs, should be forced to become bank holding companies, or receive some other form of bank-like regulation.
DataLend presents its top 10 earnings equities for January 19, 2015. This list is built on DataLend¹s universe of more than 42,000 securities on loan.
This article is the second in our series on securities finance-related activity in China. We cover liquidity coming from the People’s Bank of China, derivatives trading and the growth of the yuan in international financial markets.
Finadium has released a new survey report, “Institutional Investors on Sorting Out the New World of Securities Finance.” This report is the result of conversations and data collection from 99 institutional investors worldwide including pension plans and Sovereign Wealth Funds.
DataLend presents its top 10 earnings equities for January 12, 2015. This list is built on DataLend’s universe of more than 42,000 securities on loan.
China’s securities markets are beginning to open; any recent scan of the news can show the link between the Shanghai Stock Exchange and the Hong Kong Stock Exchange, a new OTC derivatives clearing platform at the Shanghai Clearing House and continued excitement about international access to Chinese issues. In this series, Securities Finance Monitor will explore the evolution of China’s markets with a focus on securities finance and collateral.
Finadium has released a new report in our Finadium for Investors series, “Perspectives on Direct Borrowing and Lending”. The report defines Direct Borrowing and Lending, sizes the market, evaluates pros and cons and offers recommendations for getting started.
2015 is shaping up to be the year of the securities lending CCP; banks, agent lenders and beneficial owners are all now preparing themselves for this important market move. The driver of change is that Basel III, Dodd-Frank and EMIR are starting to sink in, and borrowers need to optimize their capital usage. While repetitive to say, it remains true that the more seriously banks look at capital, the more they are evaluating all available alternatives for capital cost management. Market attitudes towards securities lending CCPs have evolved as well, and in 2015, a part of the capital solution will be found on these platforms.
On December 11, 2014, SEC Chair Mary Jo White gave a speech at a New York Times conference in New York, “Enhancing Risk Monitoring and Regulatory Safeguards for the Asset Management Industry.” She had some overdue comments on asset managers and transparency, particularly around securities lending activities. We review her comments and add what we would like to see.
DataLend presents its top 10 earnings equities for January 5, 2015. This list is built on DataLend’s universe of more than 42,000 securities on loan.
The Financial Stability Board has released 10 comment letters in response to its consultative document, “Regulatory Framework for Haircuts on Non-Centrally Cleared Securities Financing Transactions”, initially published in October 2014. These comments are good meat on the bones of the FSB’s initial proposal and should be heeded. Here are some main takeaways:
From FINRA’s 2015 Regulatory and Exam Priorities Letter:
A new and complex dynamic has emerged in securities finance, whereby institutional investors are pulling assets from long-only fixed income portfolios in their agency securities lending programs. These funds are going into unconstrained fixed income portfolios (or nontraditional bond funds), now a US$153 billion investment category, up from US$51 billion in 2011, according to Morningstar. This multi-faceted issue moves the responsibility for financing around and increases risk, hopefully with the outcome of also increasing rewards. It also brings up questions in institutional investor thinking about the process and policies in their securities lending programs.
Below is a list of the top-earning equities for securities lenders in 2014. DataLend scanned its universe of more than 42,000 securities on loan to find those securities with the most expensive financing positions in the U.S., Canada, Europe and Asia. Financing costs are determined by taking the total on-loan value of a security and multiplying it by the volume-weighted average fees to borrow that security, then converting the product of those numbers to a dollar value.
DataLend presents its top 10 earnings equities for December 8, 2014. This list is built on DataLend’s universe of more than 42,000 securities on loan.
By Chris Benedict, Director, DataLend. Lower oil prices due to a glut of supply and a strong dollar are an early Christmas gift to consumers but a big lump of coal to shareholders of many energy companies. Oil has dropped by a whopping 35% from its June highs of $102 per barrel, and the stock prices of many energy companies have followed suit. The worst hit were the shale oil firms, offshore drillers and oil companies with high debt-to-equity ratios. As the longs sold, the shorts pounced on the opportunity and the share prices of some companies dropped to five-year lows. Unsurprisingly, utilization and fees to borrow have spiked in these names as their share prices tanked. In this article we’ll take a look at some companies that have been the worst hit and are among the most actively traded in the securities finance market.
DataLend presents its top 10 earnings equities for December 2, 2014. This list is built on DataLend’s universe of more than 42,000 securities on loan.
Securities lending top 10 earnings equities – November 25, 2014. DataLend presents its top 10 earnings equities for November 25, 2014. This list is built on DataLend’s universe of more than 42,000 securities on loan.
DataLend presents its top 10 earnings equities for November 19, 2014. This list is built on DataLend’s universe of more than 42,000 securities on loan.
Federal Reserve Governor Daniel Tarullo gave a speech last week on liquidity regulation at The Clearing House 2014 Annual Conference. He laid out some pretty big themes, including the value of regulation, why Lenders of Last Resort (LOLR) matter and why the Federal Reserve was created to begin with. He also talked about recent actions in strengthening liquidity regulation in the financial system. His conclusions were that regulators are preparing to be broad-sweeping in their capture and regulation of financial market liquidity wherever it may occur.
Last week we published a new research report on the evolution of the agency lending business. One section of that report covered our thoughts about pricing in agency lending. We’d like to revisit this idea and see where it might go.
The Financial Stability Board has released a consultative document, “Standards and Processes for Global Securities Financing Data Collection and Aggregation.” Most of this is no surprise and the actual data elements were expected, but there are some twists and turns in the road to good results. We highlight the issues most likely to cause trouble for both market participants and regulators.
DataLend presents its top 10 earnings equities for November 12, 2014. This list is built on DataLend’s universe of more than 42,000 securities on loan.
A new report from Finadium takes a fresh look at the securities lending agent business model and finds three scenarios for future evolution. Agent lenders for beneficial owners, including pension plans and fund complexes, have built robust businesses based on their deep experience in the financing markets and relationships with counterparties. A regulatory, technological and operational infrastructure now exists around agency lending that was hard to image twenty years ago. Even so, securities lending is in the middle of substantial change. In order to remain successful franchises, agent lenders must evolve to meet market demands. Financial markets are built on innovation and agency securities lending is no exception.
DataLend presents its top 10 earnings equities for November 5, 2014. This list is built on DataLend’s universe of more than 42,000 securities on loan.
Securities lending top 10 earnings equities – October 29, 2014. DataLend presents its top 10 earnings equities for October 29, 2014. This list is built on DataLend’s universe of more than 42,000 securities on loan.
We assess prime broker estimated revenues for 2014 from physical financing and margin. We build on the methodology for finding prime brokerage revenue first published in “Which prime brokers are making the most money in securities lending?”, September 2013. This analysis includes further thinking about the value of internalization and the role of synthetic financing. There are some new winners in this year’s numbers. But in a declining physical market, is anyone really a winner?
An excellent post in COO Connect “Regulation of repo and securities loan in Europe will increase the burden of reporting” (October 6, 2014) by Dominic Hobson caught our eye. He writes about the creation and complexity of European trade repositories for securities finance and how it impacts fund managers.
Even at the once level headed Wall Street Journal, it seems now that any perceived wrong doing by banks is an opportunity for a headline article. This time around the topic is dividend arbitrage in securities lending, which has been flogged, abused and otherwise derided for years. Is it regulatory arbitrage? Of course it is. Is it legal and will be it commonplace until tax authorities harmonize their rules? Yes again. Unfortunately the WSJ has thrown mud into otherwise clearer waters.
Finadium held an event in London on Monday, September 22, entitled “Building New Business Models for Repo and Secured Funding”, hosting some 50 attendees. While some of the topics we heard were overlapping from other recent events, some new ideas came up too. Here’s a summary of what we discussed.
The topic of netting for repo, securities lending and prime brokerage has been alternately praised and attacked in financial markets. Proponents argue that it strengthens risk management by encouraging safe, balancing transactions by banks and broker-dealers. Critics say that netting hides risk and can be manipulated to suit the needs of the institution. Which arguments have merit and which are based on heresay and rumor?
A crowd of 30 generated a robust conversation at Finadium’s first securities lending and repo update last Thursday, September 18th in Zurich, sponsored by Zurcher Kantonalbank and Eurex Clearing. We summarize what we discussed, what we learned and where we see things going.
The conversation on the new securities lending CCP model is changing – its not so much in the future tense anymore but is moving to the present. Our panel at IMN’s Beneficial Owner’s Conference in London yesterday cemented that fact. But how soon is too soon to actually expect securities lending CCPs, that allow beneficial owners to participate directly, to be regular fixtures in the market?
We note seven events on securities finance coming up in Europe, starting with IMN’s Beneficial Owner event and ending with Collateral World, including two events of our own. This article offers a summary of where we will be, where we won’t be, and what attendees can expect. Then we wrap up the month by heading to SIBOS in Boston.
SunGard has released a new white paper, “The potential benefits of regulatory and market change for securities lending.” From the introduction:
As securities lending CCPs gain momentum, a critical feature, perhaps the most important feature at this point, is their ability to accept beneficial owners as direct participants without having to post margin or contribute to the default fund. To paraphrase Bill Clinton’s 1992 campaign slogan, “its the beneficial owners, stupid.”
Securities lending CCPs are at the intersection of major changes to liquidity and leverage in financial markets. Aside from requirements for increasing bank capitalization, Basel III is introducing new liquidity metrics such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR). These shake-ups have already begun to change relationships between borrowers and lenders in securities lending.
Some new and compelling news stories over the last week spark up talk about shifting collateral needs, and more importantly, fundamental changes to bond market liquidity that we could impact securities finance in a profound way. Here is our take:
Finadium has released its seventh annual survey of fund managers and insurance companies in securities lending. This year’s survey tackles some challenging topics including the value of agent lender indemnification in a CCP environment.
Beneficial owners are in a tough spot with securities lending CCPs. For years they have thought that CCPs were unattractive – loss of counterparty control, uncertain operations and too much margin were deal killers. Agent lenders were generally supportive of this view. But the market has fundamentally changed due to regulations, and that means that old ways of thinking are no longer sound for a successful lending organization. We look at five interrelated areas where beneficial owners should review their approach to CCPs: distribution, beneficial owner costs, agent lender costs, borrower costs and transactional pricing.
The latest Finadium survey of asset managers shows some new data points on the collateral transformation trade. We are paying close attention to this important topic. This article is part of the Finadium research subscription.
We at Finadium are working on some big picture topics these days. For the benefit of research subscribers, here are three things we think you need to be actively thinking about and two you can put on the back burner.
The US Financial Stability Oversight Council has released its 2014 Annual Report. This document contains some important forward-looking risks for market professionals in securities finance and collateral management. We highlight the major points below.