A leading hedge fund has called on beneficial owners and
agent lenders to adapt the way they conduct trades to alleviate
pressure on broker-dealers’ balance sheets.
Capital rules under Basel III have made it expensive in
balance sheet terms for broker-dealers to engage in the
practice of facilitating securities lending, as the
intermediary between the agent lender and hedge fund.
Phil Prince, managing director and head of treasury, Pine
River Capital Management, said: "The constraining factor in a
Basel III world is the broker-dealer balance sheet."
Broker-dealers’ balance sheets have become a
major constraint on the ability of asset owners to earn an
extra return on their assets and for hedge funds to be able to
take short positions.
Prince, representing the multi-billion-dollar international
hedge fund at the IMN US Beneficial Owners Conference, added:
"This piece [the hedge fund and broker-dealer] can be very
efficient in a Basel III world. But the other piece [the
beneficial owner and agent lender] can be very inefficient.
"The extent to which beneficial owners can make their half
more efficient, anything that that makes that side more
efficient, will make the entire picture work better.
For example, routing trades through a central counterparty
(CCP) between the agent and broker-dealer massively reduces the
capital cost for the later, in comparison with bilateral
He said there was a limit to how much more efficient the
interaction between broker-dealers and hedge funds can be made:
"We believe that we have come close to that limit."
"The bottom half of this picture is very balance sheet
inefficient for the broker-dealer community – and its
in your hands to make it more efficient."
While he acknowledged that the legal and governance issues
would make it near impossible for beneficial owners to deal
with hedge funds directly, he said: "There are things you
[beneficial owners] can do now that will begin to make that
more effective, to make it possible to do more of the entire
picture [securities lending]."
Lance Wargo, North American head of agency securities
lending, BNP Paribas, added that this is an issue on which
agent lenders such as himself and fellow panellist Peter
Bassler, managing director, business development, eSecLending,
are engaging with beneficial owners. "This is were we have to
educate our clients, and talk to other providers out there.
This is where we need to get to."