IMN held its 20th beneficial owners in securities lending last week in Austin, TX. Finadium chaired the conference and was represented in both individual talks and a panel. Here’s a synopsis of what we heard and what we said.
– On Tuesday, Josh Galper gave an introductory talk about the importance of counterparty default indemnification and the interplay between securities lending and OTC derivatives. The feeling at Finadium is that the importance of indemnification for beneficial owners should not be underestimated; our upcoming survey of institutional investors shows that 81% think indemnification is needed for their continuation in securities lending programs. A change to counterparty indemnification policies could mean a drop off in institutional participation, particularly for smaller funds. We also think that the more OTC derivatives get novated onto CCPs, the more that securities lending will be looked at as a source of contingent liquidity. This is a slow process, and market participants may not know they are in trouble until they are too late.
– On Wednesday, Josh Galper gave another introductory talk, this time suggesting that the wide number of regulatory trends are a net positive for securities lending. The evidence for a positive outcome included greater transparency for securities lending leading to greater Board level comfort and a focus on intrinsic value programs that heighten awareness of why funds lend and what risk they are taking. A neutral issue on the horizon are that while indemnification may take some lenders out of the market, this will shore up revenues for the remaining participants. The negatives are many, and mostly center on damaging impacts to overall market liquidity that would affect lending in turn – FTTs are just one example. In conclusion, Josh noted that Shadow Banking is a lousy name, but that regulatory changes could take securities lending fully away from the Shadow Banking label. That would be a good thing.
– A Tuesday panel on securities lending as a treasury function was well attended with many good questions from the audience. The panelists, including Josh Galper, talked about the rationale and mechanics behind using lending for generating contingent liquidity. They also discussed the risks, in particular the potential need for a bank line of credit in case of short-term cash demand needs.
Besides our own talks and panels, we walked away with a few choice insights that are worth noting:
– One panelist, speaking on his own behalf on a panel and not the bank’s, noted that behavioral change would drive the markets. We agree – hedge funds will adapt to whatever pricing, and beneficial owners will figure out how to live with more or less indemnification. Regulations and capital charges will push one way or many, but market participants will learn to make the best of the situation if there is a valid risk/reward motive.
– Several panelists noted that indemnification would not go away except for smaller clients, and that fee splits would not change. One panelist lamented any beneficial owner fee split that started with a 9 (ie, 90/10 or worse for agent lenders). Most people agreed that the biggest clients would continue to get indemnification; agents would make the case that these clients generate enough profit to use up bank capital on their transactions.
– What didn’t come up much? CCPs in securities lending. That topic will need to wait a bit for its time in the sun at IMN.
Overall, a solid event by IMN. We look forward to next year.