A Cost/Benefit Analysis Roadmap for Securities Lending CCPs
Finadium
September 2013
How can the market know if Central Counterparties (CCPs) in securities lending are a good deal for themselves and their clients relative to bilateral transactions? Answering this question from the cost of capital perspective is the challenge of Finadium’s current report.
Global trends and regulatory directives mean that sooner or later in each legal jurisdiction, cost of capital challenges will force an evaluation of CCPs in securities lending as a cost management measure. Borrowers, agents and beneficial owners each have distinct concerns however, and these concerns must be addressed both by CCPs and each individual firm in order to move forward. Nowhere is this more evident than in concerns over exposure netting. While primarily affecting borrowers, a need to optimize exposure netting can push lending activity towards larger counterparties, including CCPs.
This report presents the factors that securities lending market participants must consider to create a cost/benefit analysis of moving transactions through a CCP from a risk weighted assets/cost of capital perspective. There are many other issues as well, including suitability, reserve fund allocations, operations and whether one or both sides must post margin. While important, these issues are outside the scope of the current project. Our immediate goal is to help the industry move forward with resolving the cost of capital issue first.
This report should be read by all participants in the securities lending industry including borrowers, agents, beneficial owners and service providers.
This report is 24 pages with 3 exhibits.
TABLE OF CONTENTS
■ Executive Summary
■ A Capital Problem
– Is There One Right Answer?
■ Universal Concerns
– Exposure Netting
– Pricing
– Benchmarking
– Cost of Capital Analytics
■ Specifics for Agent Lenders
– Is a CCP Guarantee Equivalent to Agent Lender
Indemnification?
■ A Cost/Benefit Analysis Checklist
■ About the Author
■ About Finadium