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Sec finance market looks to ease "binding constraints"

17 February 2017

Binding constraints on dealers have limited capacity to service securities finance market

Read more: dealers securities lending borrowing

An industry-wide effort to find ways of connecting lenders and borrowers on favorable terms should be a priority for the securities finance market in 2017, executives said this week.

Reduced balance sheet capacity, primarily caused by regulation, has resulted in large broker-dealers (borrowers) being far more sensitive on the types of securities, collateral and counterparties they trade with. 

Agent lenders conducting business on behalf of beneficial owners face their own pressures, meaning these typical types of lending and borrowing intermediaries have limited capacity to service securities finance market activity to the levels they once did.

"Every dealer will be looking at their own set of binding constraints, be it the net stable funding ratio (NSFR) or risk weighted assets (RWAs)," said Duncan Foster, managing director at Morgan Stanley, speaking at an RMA event in New York this week hosted by law firm Debevoise & Plimpton.   

"The industry needs a set of collegial solutions in order to get 90% of the way towards efficient borrowing and lending for all counterparties as opposed to searching for a panacea for everything."

Central counterparty clearing houses (CCPs), such as Eurex in Europe and OCC in the US, are building new models to satisfy both sides of a securities finance trade. 

Meanwhile collateral flexibility and term trades are being used more frequently by lenders to match what the borrowers are looking for and meet evolving demands.

Deutsche Bank’s Tony Toscano – another panelist at the RMA event – said anything that will help save capital will be welcomed by both the agent lenders due to the cost of indemnity, as well as borrowing community for capital they have to set aside. 

However, he suggested that broker-dealers currently hold most of the cards and the market takes time to adapt. 

"Business will ebb and flow in 2017 depending what large broker-dealers need. Securities lending desks will have to adapt," Toscano added. "That could mean facing off with different legal entities or changing collateral structures to pledge rather than rehypothecation."

Alex Blanchard, head of US repo at Goldman Sachs, stressed the importance of informing clients on the current restrictions faced by traditional market participants. 

He commented: "Balance sheet has become an allocated rather than a priced resource. Educating customers and beneficial owners on whether they are going to pay a lot of costs or generate higher returns through larger transactions is the bigger point."

Another panelist at the event, representing the agency lending business of a major US bank, said that alternative ways of connecting lenders and borrowers are starting to appeal. 

"Clearly there is demand for high-quality liquid assets (HQLA) and many beneficial owners have supply. New bilateral structures are starting to generate more interest," the individual said the in discussion, moderated by Debevoise & Plimpton's David Aman.

This week a report by Aite Group said participants in the securities lending market will need to  move toward a more streamlined electronic infrastructure that will provide interoperability across jurisdictions if the sector is to grow.  

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