Ahead of Finadium’s Investors in Securities Lending conference (FISL), we speak with our panelist experts from the Depository Trust & Clearing Corporation (DTCC) and Provable Markets about the value and functioning models of cleared securities lending.
An equity finance central counterparty (CCP) model in the US that accepts the buy-side has long been needed, and while attempts have been made over the years, Finadium’s view is that the plan from DTCC’s National Securities Clearing Corporation (NSCC), approved last year, stands the greatest chance of success in the US.
Narrowed down to one word, the major benefit of the NSCC’s SFT Clearing Service is capacity, said Jim Hraska, managing director of Clearing Agency Services at DTCC. From the lending side, agent banks can now become CCP members of NSCC and, because of the novation process, they have access to a wide array of borrowers thus avoiding constraints of single-counterparty credit limits. From the borrower perspective, a big part of the benefit is 2% RWA cost compared to between 20-100% for bilateral as well as an ability to net off balance sheet.
Clearing traction
One of the drivers for utilization will be cost of capital, and as that goes up so will the volumes. NSCC has a supply side lender and some of its borrowers live and actively working on building cleared volume, with others in the onboarding pipeline.
At the moment, there’s a lot of people with “eyes on glass” to see how that develops, said Hraska: “Once we get a major agent lender who comes on and prints a few trades, and a borrower who is in that mid-tier to larger tier, you will start to see groundswell of activity come in. People are just waiting to see who takes the first steps.”
In addition to the capital benefits, Hraska explained central clearing also offers a variety of operational efficiencies to the securities lending community, including the elimination of manual contract-compare processing and agent lender disclosures (ALD), as well as billing and reconciliation; pairing off settlements; and lining up operations for T+1 settlement, such as recalls, as an example.
Beneficial owner DMA
Along with supporting broker-to-broker activity, there are two buyside models that are offered as part of NSCC’s SFT Clearing Service, – one that is fully disclosed and similar to the FICC Sponsored Service, and another that is non-disclosed and more like FCM or DCO-style agented clearing. The DTCC team is working closely with Approved SFT Submitters to establish connectivity and access.
For beneficial owners, it can be a form of direct market access into seclending, said Matt Cohen, CEO at Provable Markets, an Approved SFT Submitter: “The traditional burdens that have historically plagued new offerings – everything is going to cost a lot, requiring a long-term commitment – are removed…We’ve built from scratch a trading platform that embeds post-trade, pre-trade (and) point-of-trade all under one umbrella, while also focusing on seamless integration with existing infrastructure such as FIS’ Loanet.”
Provable matched and processed the first securities lending transaction cleared through the new SFT service in October last year, and for the last three months has been working on the build out for straight-through processing with FIS, BPS and other back office processing systems.
“It was a lot of heavy infrastructure lift, but that allows us to scale and to hit the goal of (fewer) operational burdens… The result of that is we’ve been able to get customers onboarded, tested in UAT and into a production environment in a few days with very little overhead,” said Cohen. “This is a benefit not only to capital and balance sheet, and accessibility, but also to operational pain points.”
BNY Mellon’s Jill Rathgeber will be joining Jim and Matt on the panel “Evolution of the cleared securities finance market” at FISL, which takes place in New York City from May 17 to May 18. It is our 7th annual conference bringing together a broad cross-section of the industry to share expert insights and is free for qualified buy-side firms including asset owners, asset managers, insurance firms and hedge funds. Register here.