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
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
"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
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
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
"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.