Finadium’s Investors in Securities Lending (FISL) conferences are bringing together a wide spectrum of participants in the securities finance market, and so far that’s shaping out to be a major success. Over 150 buy-side registrants representing some 90+ firms arrive today in New York to take part in a packed agenda of the biggest issues impacting the modern securities lending market. SecFinMonitor talks to Finadium’s Managing Principal, Josh Galper, about what to expect.
SFM: Why is this conference happening? What makes it different from other events in the space?
FISL is different because of the diversity of attendees joining and topics covered, whereas most conferences tend to have focused only on one part of the market or another. We hope that by expanding the conversation to include a wide variety of market participants, we can encourage new business opportunities in the marketplace. Our main hope is that investors of all sorts leave thinking about how securities finance can be useful in their businesses. If investors ⎼ and not just securities lending managers but also traders, portfolio managers, risk managers and others ⎼ return to their offices with a greater understanding of securities finance, and are able to apply that understanding to trading and investment strategies, this becomes a benefit not just for intermediaries and technology providers in the market, it also becomes a benefit to the market as a whole as securities finance is a key element for liquidity generation in both equities and fixed income.
SFM: There are a substantial number of hedge funds registered. What’s the value of hedge fund portfolio finance managers and investors in securities lending programs being in the same room?
We are very pleased to say that over 30 hedge fund portfolio finance managers have signed up to attend this event. We had initially invited this audience despite not having programming that was particularly focused on their needs. We found however that the conferences are of interest to them because they are able to connect directly with long only investors lending securities. This conversation can be the starting point for entirely new ways of doing business in the marketplace.
As a result of hedge fund sign ups, we have created a new networking session specifically for this audience. If there is continued demand from hedge fund portfolio finance managers in the future, we will devote more conference time to their particular interests.
SFM: On the agenda will be discussions from all angles of the market: what major developments have led to the state of the securities lending market today?
The greatest development over the last 10 years has been the evolution of Basel III, Dodd-Frank, EMIR and similar regional initiatives and regulation. The impact on bank balance sheets cannot be overstated, and, in fact, in many cases has pushed the securities finance market to new experimentation into how new counterparties might be found, and what transactions are most important or even viable.
Securities finance tends to be a conservative marketplace: Finadium estimates that currently 97% of securities lending and repo transactions happen with the use of bank credit intermediation. Without an incentive push from regulation, it is possible that no change would have occurred in this marketplace. Now that regulation has created such a massive incentive for banks both as prime brokers and agent lenders to reduce their capital, their balance sheet exposures, change has finally occurred.
SFM: Can you provide a snapshot of the situation right now?
Today’s market continues to be dominated by large borrowers and lenders with general collateral, warms, and hard to borrows all active in the marketplace. However, the amount of general collateral borrowing is down from several years ago and could reasonably expect to fall further going forward without some other change in the market. This is a very important development, especially for lenders receiving cash who then reinvest that cash to earn a profit.
Change in general collateral could in fact force a new degree of market evolution whether by enabling direct or Peer to Peer platforms, or CCPs, where general collateral carries no or a much lower regulatory cost for banks, or as a negative outcome, less general collateral lending lowers overall volumes of cash for reinvestment.
SFM: How do you expect things will unfold?
The future of securities finance depends either on the ability of banks to finance transactions, or the creation and acceptance of non-bank platforms that either support credit intermediation or allow borrowers and lenders in securities lending and repo to meet directly and be comfortable with their counterparty credit exposure.
The business of securities finance is intricately linked to credit and the comfort of end-borrowers and end-lenders. As a result, “the crystal ball” view starts with ensuring that so long as credit is acceptable, a wide variety of options beocme realistic. However getting to that starting point can require substantial education and change in deciding what is acceptable.
Finadium’s FISL in NY runs April 3-4. FISL in London starts April 26.