Our annual Finadium Investors in Securities Lending (FISL) conference in New York is just around the corner on May 14-15. In our first preview article, we examined how agent lenders are riding out market turmoil amid a proliferation of options for beneficial owners. This week, we get a sneak peek from our panelist experts from DTCC, eSecLending and J.P. Morgan about the way securities lending program motivations and relationships are changing.
Trust and transparency are paramount as part of a long-term commitment to the securities lending business and to ensure successful relationships between agent lenders and clients, which becomes particularly evident in the current volatile, uncertain market environment, said Brad Fryer, executive director at J.P. Morgan, who will be speaking on The present and future of agency securities lending: Agent lender leaders panel.
Programs have become less “set it and forget it” and far more actively managed, particularly in the communication and understanding of risk and opportunity, for example in customization or flexibility in securities lending programs.
Customization could refer to trade types, tradeable markets, and both internal and regulatory requirements, while flexibility leans more towards how collateral can be used. Performance meanwhile is measured differently depending on how each program is customized.
The best result for engagement comes from beneficial owners, borrowers and agent lenders being “synced up” with clear goals on resource management and optimization, but Fryer also noted that not all solutions are right for any given party.
“An agent can go and create some tools and system capabilities, but without knowing who you are scaling it to and building it with, (an agent) might find (themselves) in potentially not as big of a raft if they’d just coordinated from the get-go,” he said.
At the forefront of client relationships is technological innovation in the market at a time when a broad swath of industry is progressing on digitalization, he added: “Some things are going to be more easily advanced than others, but we want our clients to be knowledgeable about those things so that they can also provide input as to what’s important to them down the road.”
Total liquidity
Customization has been a priority, whether for program guidelines and parameters, regulatory and other reporting, or overall risk transparency, for years. At the same time, beneficial owners are looking at the broader picture of what types of services they are seeking to integrate securities financing activity as a whole in support of better returns, but increasingly also liquidity planning for leveraged funding, said Brooke Gillman, managing director and global head of Client Relationship Management at eSecLending, who will be joining J.P. Morgan’s Fryer on the Agent Leaders panel.
Aside from the binding constraint of agent lender balance sheet, borrowers too are challenged towards achieving those goals, she said: “Banks are already moving towards solutions to reduce their capital charges and the balance sheet implications of these types of transactions. And they’re doing it because they are under regulatory pressure, and expect to be in the future under further regulatory pressure.”
She describes a “race to who can get to the lowest RWA faster”, for which beneficial owners want balances of cash collateral while banks, over time, will be placing constraints around how much of those kinds of activities they transact, and with which counterparts.
It is imperative that market solutions consider how transactions will be in a stronger position for banks to reduce capital charges at a lender level, at a time when sophisticated buy-side institutions are weighing “total liquidity plans” in addition to the return and intrinsic value of securities lending programs, she noted: “If beneficial owners are able to evolve (their) program, (they) will ultimately be able to maintain the lender of first choice advantage versus peers.”
Secret sauce
Securities lending market participants should prioritize an in-depth understanding of the capital used in the business to recognize limitations, said John Vinci, managing director and head of Secured Funding and Collateral Management at DTCC, who will be facilitating a breakout session: CCPs in securities lending and repo for the buy-side: Readiness and Access Models.
From a wholesale funding perspective, the key word is access, with beneficial owners wanting more of it to credible borrowers, whether direct or through agent lenders, all without negatively impacting their risk profile, he explained. Vendors meanwhile want to be able to offer client network access to as many markets as possible.
What’s yet to be fully realized is interoperability, despite agent lenders and vendors trying to make strides. One major efficiency pain point is collateral mobility, which often requires costly overfunding while being reliant on manual processes.
The “secret sauce” is being able to gain access efficiently, in other words in a less expensive or capital-intensive way, by finding a “happy medium” with liquidity over a 24-hour day while balancing how much staff is needed to manage it all, he said: “It’s a combination of that happy spot in the middle that you are always reaching for, and it’s never perfect.”
Brad, Brooke, and John will be joining colleagues from Fidelity Agency Lending, Options Clearing Corporation (OCC), Pacific Life Insurance Company, and S&P Global Market Intelligence at FISL, which takes place in New York from May 14 to 15. It is our 9th annual conference bringing together a broad cross-section of the industry to share expert insights on the latest and most important developments in securities lending. Registration is free for qualified buy-side firms including asset owners, asset managers, insurance firms and hedge funds.