DTCC’s equity finance central counterparty (CCP), expected to launch in early 2021, has the potential to change long-held patterns in the securities lending industry, both in the US and abroad. This research report looks at the business model, challenges to the application of margin, and impacts to beneficial owners, agent lenders, prime brokers and potential new sponsor entrants.
An equity finance CCP model in the US that accepts the buy-side has been long needed but not realistically expected. Various attempts have been made over the years, but none have yet surmounted major challenges of acceptance by incumbents nor satisfactorily answered what to do about collateral and margin. A new proposal by DTCC’s National Securities Clearing Corporation (NSCC) in 2019 stands the greatest chance of success in the US we have seen so far.
The attractiveness of the equity finance CCP is balance sheet savings for borrowers and agent lenders; this is the standard playbook for all new CCP introductions in the last 10 years. Eurex’s Lending CCP example has been seen and appreciated by international banks, who would like to see the same balance sheet savings for their US business. It has even been mentioned that a broad adoption of a CCP in securities lending could yield better balance sheet results than prime broker internalization, which has typically been the lowest cost option of all.
While the headlines of a US equity finance CCP should be positive for securities lending as a whole, a new business model structure means new opportunities and competition. Three of the most impactful areas are: a buy-side view of securities lending as a desk-level traded product using the services of a sponsor; challenges to agent lenders from any NSCC clearing member that may see sponsored equity finance as an entry point to buy-side relationships; and an expansion of the GC model to specials, because if balance sheet costs are lower for GC, then why not for specials too?
These factors should be driving strategic considerations of the equity finance CCP model by securities finance desks and technology providers. As banks and asset managers continue to go through a major phase of technology adoption and operational restructuring, a new CCP introduction looks likely to both drive and benefit from these changes.
This report should be read by any securities finance desk lending or borrowing US equities or corporate bonds.
A direct link to the report for Finadium research clients is https://finadium.com/finadium-report-desc/are-you-ready-for-dtccs-equity-finance-ccp/
For non-subscribers, more information is available here.