Single Stock Futures, Prime Brokerage and Securities Lending

Finadium
May 2013

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With no end in sight to a world-wide squeeze on balance sheets, alternatives for financing positions are getting a more receptive hearing than ever before. In this report, Finadium revisits the case for single stock futures (SSFs) and considers reasons for prime brokers and beneficial owners to evaluate these equity-linked derivatives as a revenue opportunity, as well as the resistance that SSFs still produce in the prime brokerage market.

Finadium’s new report looks at the mechanics of SSFs to help determine the role of this product in the market for prime brokers and beneficial owners in securities lending. Though SSFs generally operate by regular rules of futures markets and are widely traded, especially in European markets, in the US these products have been the subject of much debate and wrangling over regulatory oversight between the SEC and CFTC.

At the same time, centrally cleared SSFs fit a key requirement as banks move towards compliance with Basel III and other regulations. For the first time in many years, the future looks bright for the US’s only exchange, OneChicago, and only very recently are we hearing major hedge funds and other asset managers seriously consider these listed derivatives as opposed to conducting a trade on equity markets. This report also looks at the fortunes and workings of OneChicago in light of new regulatory pressures on bank balance sheets.

This report should be read by prime brokers, securities lending agents, beneficial owners in securities lending and portfolio managers of long/short funds.

This report is 25 pages with 7 exhibits.

TABLE OF CONTENTS

■ Executive Summary

■ Single Stock Futures in the Post-Basel III World
– Defining the SSF Market

■ The Workings of Single Stock Futures
– Pricing Single Stock Futures
– Margin and Financing Costs for Buyers
– Shorting with Single Stock Futures

■ The Fortunes of OneChicago
– Mechanics of the OneChicago Market
– Exchange for Physicals

■ Arguments For and Against
– Synthetic Prime Brokerage vs. Prime Brokerage
– Beneficial Owners in the SSF Market
– The Down Sides to Single Stock Futures

■ About the Author

■ About Finadium