FISL 2022: beneficial owners can find opportunities in a changing prime brokerage landscape

Ahead of our upcoming Finadium Investors in Securities Lending conference, we speak with experts from Scotiabank and Clear Street about how prime brokerage service models are changing to meet new client requirements.

The past year for prime brokers was punctuated by a contraction in the industry, with Credit Suisse’s decision to exit the business and BNP Paribas’ acquisition of Deutsche Bank’s book.

For beneficial owners, the potential implications depend on how a smaller number of prime brokers will handle a larger amount of assets, though some of the associated concerns can be negated because institutions are sophisticated when it comes to internalization and netting, explained Brendan Eccles, global head of Securities Lending and US head of Hedge Fund Coverage at Scotiabank.

Eccles has been with Scotiabank since 2004, starting in Toronto and moving to New York shortly after as the US Prime Brokerage was being built in the Global Banking and Markets division. Along with managing the securities lending business globally, he supervises the hedge fund coverage team and total return swaps desk regionally.

He explained that the dynamic of fewer traditional players gives rise to a variety of opportunities: rates for hard-to-borrow facilities could get a bump, with agent lenders and beneficial owners reaping potential revenue benefits. The enhanced custody models set up by large lenders have paved the way for direct access to hedge funds. And peer-to-peer (P2P) lending is increasingly getting attention.

“There’s a lot of different solutions and technologies in the market which will give beneficial owners the ability to work with many clients that they wouldn’t historically have been able to access,” said Eccles. And having fewer participants makes it more natural for those activities to happen now, especially as market transparency and advancing technologies are making it easier for new participants to gain share.

“Periods of market disruption gives new entrants in the market an opportunity to take on clients in times when they need alternate providers,” Eccles said. “There are many smaller players focusing on different things in retail, and other US banks that traditionally have mini-primes.”

New entrants and retail players

Clear Street is a fintech company currently building out a cloud-native platform on AWS to improve access to the capital markets, beginning with prime brokerage. The firm is looking to “desilo” the front-middle-back office configuration as well as the division between asset classes, including securities financing, said Brad Bailey, Head of Market Intelligence at Clear Street. Typical clients include hedge funds in the $50-$500 million range, asset managers and family offices.

Bailey’s experience in capital markets crosses technology, sales and trading, and marketing. In his role today, he is observing market forces resulting in prime brokers trimming services and keeping tech budgets stagnant, leaving many funds looking for alternative providers and solutions. Asset owners are also seeking innovation, to better lend assets for instance. They also need providers who can handle the processing burdens.

“(Asset owners) want to make sure that they are effectively managing their programs, so they are using multiple providers to try to secure competitive rates, better see what’s going on, have choice, and also, to avoid running up against limits to how much they can do with one particular counterparty,” explained Bailey.

This dynamic is running headlong into a landscape where there have never been more data requests coming from regulators, markets are moving faster, and collateral and balance sheet optimization are an operational necessity.

“We’ve seen constraints on supply, we’ve seen increasing demand, we’ve really seen a thirst and a desire for more modern ways of operating, be it through modern reporting or better technology, or both” he said. “On the beneficial owners’ side, we see similar things. More beneficial owners have learned a lot about what they can do with their assets and now they are looking for the modern tools to implement those strategies.”

Technology also plays an important role in making it easier, and even possible, for retail players to lend stock, which should be helpful for market liquidity. With the meme stock phenomenon still fresh in the minds of securities lending market participants, Scotiabank’s Eccles has seen hedge funds become much more concerned over whether they will be able to stay in their short positions, and what it’s going to cost them.

“If there were more organizations willing to lend stock, then you wouldn’t have seen some of these participants get squeezed out of their positions so quickly,” he said. “Having more liquidity will lead to more people having the confidence that they can short a position and not likely get squeezed out at the worst possible time.”

We also spoke with Fidelity Lending Agency and Provable Markets about securities lending market dynamics as we head into the conference. Check it out here

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