Despite the OCC’s centrally cleared volumes
steadily rising widespread adoption of CCPs in the securities
lending market has yet to occur. We asked US lenders and
borrowers at a recent roundtable in Boston if they expect a
notable shift in 2017. Here's what they said:
Brendan Eccles, Scotiabank:
OCC’s securities lending programme has made it
much more attractive for broker-dealers to face each other.
Previously, only one or two specific counterparties had a
desire to use that structure. We saw that balloon in 2015
– we are now dealing with around 20 firms. It makes
sense, especially if you have an options book to net some of
your margin requirements off against. From a risk-weighted
assets (RWA) perspective, its one-fiftieth of the charge
compared to trading with a broker-dealer counterparty.
EquiLend’s recent purchase of AQS will mean the
trend towards CCPs continues. We’d like to see
agent lenders more involved, although that’s a
longer term goal.
Nancy Allen, DataLend: We are seeing an
uptick in demand for CCPs and are confident CCP use will grow.
In 2016 we bought AQS and established EquiLend Clearing
Services, which is partnering with the OCC to provide
connectivity to its central clearing service. We did this in
response to strong demand from our clients to offer seamless
access to central clearing services. We continue to work with
OCC on developing the right model for the market.
Jim McDonald, State Street: CCPs are
definitely part of our future, but there’s still a
lot of work to do. Models need to be more operationally robust
in terms of how they manage processes for beneficial owners and
agents. The capital benefits look significant though and, if
the demand side migrates in that direction, eventually the
supply side will follow.
Bill Smith, JP Morgan: Risk mapping is the
real issue. The CCP model is a radical shift from bilateral
transactions. An analogy may be the repo business, which years
ago moved from bilateral to tri-party. However, the shift to
CCPs is more complex. We have risk metrics that can help us
assess the risk in CCPs – but the
clients’ perspectives on risk, and opportunities
for risk mitigation, will be big questions.
Pat Morrissey, Vanguard: We are taking a
wait-and-see approach since CCPs need to be evaluated in terms
of 40 Act Fund rules, indemnification and the processing of
corporate actions. There are a lot of open-ended questions and
we look forward to more discussions. It’s still
early in the game – maybe we’ll hear more
Nancy Allen: It will be interesting to see
whether two-tier pricing develops once CCP adoption is
widespread given the capital cost advantage of trading through
a CCP. DataLend plans to capture data on CCP trades to provide
transparency to beneficial owners.
Jim McDonald, State Street: Both the
borrowers and lenders will have their priorities for how they
want to transact, which should produce an environment in which
some trades will be centrally cleared and some will stay
bilateral. Each will be priced differently. This selection
process will need to be matched through increased automation
which will need to evolve in order to service a market that has
become more diverse.