April 2024

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Once again, new regulations are forcing through important changes in the securities finance market, many of which will be in place by 2025. The majority of market participants in securities finance, from asset managers and owners through to hedge funds, will see changes in their supply and demand dynamics that require proactive positioning for success either independently or through intermediaries.

Beneficial owners and their service providers face two major challenges: ensuring that their risk-weighted asset charges (RWA) to borrowers are reasonable relative to the value of assets they have to lend, and providing a best-in-class operational experience. Whether using an agent lender, a sponsor on a central counterparty or lending themselves, these two conditions must be met for beneficial owners to generate risk-adjusted revenues for their stakeholders and remain a preferred lending counterparty.

While a few beneficial owners have made their plans already, others are still working to decide their best routes forward. They may not have much longer. As Basel III Endgames come into force in the UK and Europe and the US works to reset its initially criticized finalization proposal, agent lenders and borrowers are experimenting with a range of balance sheet-friendly lending solutions. There is no reason to assume that the options going forward will work for every beneficial owner in lending today.

This planning exercise should be read by any securities finance market participant including asset managers and owners, banks, broker dealers, agent lenders, and their service providers. The findings matter for existing service providers as well as new entrants looking to capitalize on changing market conditions.

Table of Contents

  • Executive Summary
  • The Need for Business Planning
    • – Basel III Endgame as the Single Biggest Change
    • – RWA in Securities Borrowing by the Numbers
  • Focus Areas for Lenders
    • – Changing Credit Weightings
    • – The CCP Opportunity and Challenge
    • – Total Return Swaps
    • – Bank Indemnification, Insurance and “CCP Indemnification”
  • The Opportunity of Regulatory Change
    • – Summary of Business Strategies
  • About Finadium LLC

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