This blog post first appeared in the December Securities Lending Focus produced by SunGard’s Astec Analytics.
Attending a recent beneficial owner summit hosted by a large agent lender, it was pleasing to see the level of engagement and optimism in the room. The cynical might believe the high attendance was due to a combination of the excellent bacon sandwiches on offer and the fact that the market is quiet enough to allow a whole morning to be invested in such matters. However, those with a more positive outlook might see something different: a much more engaged and better informed set of organizations that are investing much more time and effort in the business of securities lending.
As might be expected, a great deal of the panel discussion time was spent on regulation – the last couple of years have seen an unprecedented breadth and depth of regulatory uncertainty and change, with securities lending being affected directly and indirectly by Basel III, Dodd-Frank and the various machinations of the Financial Stability Board (FSB). However, a strong message being broadcast by Kevin McNulty, ISLA Chief Executive, was that the regulations were clearer than ever before and the uncertainty of just how the industry is going to be affected continues to diminish.
That is not to say that there are not bogeymen lurking in the small print of the regulations; the Financial Transaction Tax (FTT) is one such risk. The FTT is to the securities lending industry is what Kryptonite is to Superman, at least in its pure form. Many observers suggest that the FTT will never come into force in the guise it was first expected and feared, and some believe it may simply be quietly brushed under a carpet in Brussels as political will loses to economic reality.
The FSB’s guidelines on repo and securities lending contains their own traps – numerical floors, or minimum haircuts, are mooted for a limited type of financing trades. The fact that these floors are below what can be seen in the normal market place currently has indicated that these may not be an issue. However, two possible effects should not be ignored. Firstly, numerical floors could spark a competitive rush to the bottom, actually reducing margin levels from current market norms. The second possible outcome is more risky and difficult to predict – having set a floor, the FSB have effectively installed a lever that they can pull to raise the floors and potentially squeeze off liquidity whenever they wish. This, together with many of the other regulatory issues discussed at the summit, support multiple objectives – shining a light into the world of shadow banking, increasing regulatory control over the financing market, and potentially reducing it in size.
Overall, there is a much more positive mood in the industry going into 2014 with some positive expectations regarding revenues, new markets expected to open up and increasing regulatory clarity. What may result from all this change is a more regulated, potentially smaller and more efficient financing industry with fewer, better capitalized participants. The industry needs to adapt to the new landscape and make the best out of it, and I have little doubt it will.