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Sec lending market opening up to new structures

25 January 2017

CCPs, principal lending, peer-to-peer and pledge structures all being given greater attention

Read more: CCPs stock loan Deutsche Borse ISLA securities lending

The majority of market participants at Deutsche Borse’s Funding and Financing Summit are looking at alternative securities lending structures.

Over 60% of the audience at the Luxembourg event this week claimed to be exploring new models as part of their financing efforts in the current low yielding environment accompanied by strict regulatory requirements.

Centrally cleared stock loan trades (40% of the audience), principal lending, peer-to-peer trades and pledge structures (17%) are among the new routes being looked at as extensions or complete replacements of the traditional agent lender model.

Andy Dyson, chairman of securities lending trade body ISLA, said the responses were encouraging and showed that institutional lenders and borrowers of securities are aware of a "changing environment."

"The securities lending market is reflective and reactive to change, not isolated in its own bubble," he added. "Regulatory and capital frameworks are catching up with market participants and model are changing."

James Day, who runs BNY Mellon’s securities finance business across EMEA, said it’s "not surprising" to see firms exploring new options. 

"Certain clients are keen on the CCP route. Peer-to-peer lending interest is growing as banks pull away from the repo market. Meanwhile, pledge structures are appealing to the borrowing community," he added.

Under a pledge, collateral and margin stay within the borrower’s ownership. This results in a much lower risk weighting, cutting the cost of executing securities lending transactions for borrowers.

Meanwhile CCP’s, such as Eurex Clearing (part of Deutsche Borse), are growing in popularity due to their ability to simplify multiple counterparty credit structures to a single entity, reducing regulatory capital requirements and delivering efficiencies. 

"CCPs and pledge structures are different ways of trying to attack the same problems," said Morgan Stanley’s Susan O’Flynn, adding that 40% of the audience considering CCPs is a higher figure than the 20% it would have been two years ago.

"For example, each offer a solution to mitigate the impact of single counterparty credit limits which place buffers on excessive credit exposures of large banking organisations to a single firm.

"There are challenges though, particularly when joining as CCP. It can be a lengthy onboarding process," O'Flynn added. "Connectivity is not insignificant. The direction of travel hasn’t gone as quickly as we would have liked."

After years of development, the concept of central clearing across securities finance is towards end of development phase, but it remains the "new kid on block", according to ISLA’s Dyson.

"Some would argue that the securities finance industry has been slow to adapt to CCPs, or vice versa," he said at the Luxembourg conference. 

Roelof Van der Struik, who handles securities lending at Dutch investment manager PGGM, was cautious and said his firm is used to dealing with counterparties it knows intimately. 

"A CCP is a very different proposition for a broker, compared to an asset manager. I have to consider PGGM’s liquidity and fund stability, which becomes a very serious issue if more of the business runs through a CCP."

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