Finadium presents the results of a survey of leading agent lenders conducted in October 2022 to hear their views on technology investment, ways they are supporting their clients in lending securities to non-prime broker counterparties, CCPs and market conditions. This report can assist due diligence efforts for beneficial owners and offer an inside look at agency lending for service providers, technology providers and regulators.
Agent lenders are a central part of the securities lending supply chain. What they say to their institutional beneficial owner clients, how they invest in their businesses and how they think about market structure results in observed changes throughout the industry. The agency lending market is concentrated; there may be no more than 20 notable market participants between the largest and the smallest, and the top 10 players control the majority of loan activity. This means that a small group of bank and non-bank affiliated institutions are a leading indicator of securities lending market activity globally.
Agent lenders report that market conditions are strong in Q4 2022 for their business. This is the result of market volatility and rising interest rates that generate short selling opportunities in both equities and fixed income. The backdrop remains balance sheet constraints at borrowers and their focus on risk-weighted assets (RWA) and Single Counterparty Credit Limits (SCCL). Every agent we spoke with mentioned this in some way, including non-bank agents that appreciated they did not share the same limitations as bank-affiliated agents. Still, balance sheet is a collective concern that agents say is capping what business they may be able to conduct either now or in the future. A balance sheet-constrained world is also driving investigations into alternative business models including agency borrowing, Peer to Peer, guaranteed trades and capital mitigation strategies with providers of structured financing vehicles
Complex regulatory proposals have caused the securities lending industry to improve transparency and change its approach to balance sheet management. While Europe’s Securities Financing Transactions Regulation (SFTR) is complete, save for a discussed reboot, the US Securities and Exchange Commission 10c-1 proposal has been published and the US and Canada will move to T+1 settlement in 2024. The next and hopefully final phase of Basel III rules around the world will have yet more impact. The responses of agent lenders and their clients will help determine how liquidity for operational settlements is made available to the market.
This survey investigates the thinking of securities lending agents at the end of 2022. It provides an overview to the market, recognizing that while each agent runs a program for the benefit of their unique client bases, finding the commonalities of this group helps provide direction for beneficial owner clients, borrower counterparties, service providers and regulators.
A direct link for Finadium subscribers to this report is https://finadium.com/finadium-report-desc/agent-lender-survey-2022/
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