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CCP plus points starting to appeal to lenders

01 February 2017

Distribution of inventory and price discovery cited as key benefits

Read more: CCPs securities lending

The benefits of feeding securities lending trades through CCPs are becoming better understood by pension funds, asset managers and their agent banks, industry experts claim.

Despite being widely used and mandatory in some cases across the derivatives market, CCPs, which sit between a buyer and a seller of a security, have been slow to take off in the stock loan business.

OCC in the US and Eurex Clearing in Europe have invested heavily in developing models, but much of the activity so far has been in the broker-to-broker market. Advocates are increasingly trying to attract a wider range of users, particularly beneficial owners and agent lenders.

Speaking at the IMN Securities Finance Conference in Florida this week, Mark Skowron, head of US Trading, Northern Trust, said there are "tangible benefits" on offer to beneficial owners.

"Overall, CCP’s are a net positive for this industry," he told event attendees. "Better distribution of securities lending inventory and price discovery are two specific areas where CCPs can help beneficial owners."

Arianne Collette, director of bank resource management at Morgan Stanley said that "capacity and stability" are also enhanced by centrally cleared securities lending.

"It’s also important to remember that CCP’s aren’t a black box – beneficial owners still maintain visibility with their counterparties," she added.

OCC’s stock loan CCP service has been in place for two decades but volumes have been rising rapidly of late. This week it reported a 32% increase in new loans in January, up from the same month in 2016.

Chip Dempsey, OCC’s chief commercial officer, said the Chicago-based business is focused on expanding its list of agent lender and beneficial owner members.

"We hope to have a revised model in place by the end of this year, subject to regulatory approvals, which offers clear benefits to the lending community," he added.

Speaking to Global Investor at the end of 2016, JP Morgan’s Bill Smith said 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."

OCC's Demsey said this week that the focus is on a CCP model which maintains the operational aspect of bilateral trades while at the same time taking on clearing and risk management obligations.

 In terms of pricing, most industry experts expect a two-tiered structure to emerge as CCPs become

"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’s Nancy Allen told Global Investor/ISF recently.

DataLend's parent company EquiLend has already made inroads into the central clearing market for stock loan trades.

The company acquired AQS last year, a platform which facilitates clearing and settlement via OCC.

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