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Sec lending CCP usage tipped for growth in 2017

01 February 2017

Demand for seamless access to central clearing services is on the rise

Read more: clearing CCPs securities lending

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 during 2017.

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.

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