Among the hot topics at our fast approaching Finadium Investors in Securities Lending (FISL) conference, one of the panels will examine the ways that market players are solving challenges in balance sheet and operations management. We speak with our experts from eSecLending and Fidelity Agency Lending about the strategies being deployed.
There are a variety of strategies already in place and more yet to emerge, said Brooke Gillman, global head of Client Relationship Management at eSecLending, also stressing that impacts of pending regulatory changes are going to have major knock-on effects for buy-side and banks alike, and it will change market behavior and require adaptation.
The US market is a high-volume, heavy balance sheet-driven market with a lot of general collateral trading, and those are the transactions that ultimately require more capital efficient trade structures and solutions if they are going to continue over time, Gillman noted. Broadly, she describes an environment in which a minority of US borrowers are changing trade structures and routes, while a majority are in the midst of legal, product and operational work to determine the best way forward.
Strategic options
Strategies that are working are CCP adoption, albeit minimal, and a significant shift towards agency prime, in which prime brokers move business from a principal to an agency model arranging transactions between borrowers and lenders. The market is also looking at asset segregation and pledge or pledge back models.
Peer to peer, she said, can be viewed as revenue additive while also filling a void for buy-side institutions that have consistent or increasing needs for financing transactions of liquidity-driven trades, Gillman said.
“Each borrower is likely to seek a different solution or maybe multiple solutions to ultimately address increasing capital costs to allow for the same or similar transactions to occur in the future,” Gillman explained. “Those beneficial owners that have the ability to be more flexible and to allow for the various solutions to be put in place for their own programs, they will ultimately rise to the top in terms of supply that those borrowers focus on and prioritize, and will benefit longer term by being becoming those lenders of first choice.”
Micromanaging balance sheet
The landscape around financing businesses is resilient and ever changing, creating opportunities for firms to react creatively for the benefit of their clients, said Jon Whiting, head of Fixed Income and International Equity Trading at Fidelity Agency Lending.
Outside of the more traditional bilateral securities lending programs, CCPs and pledge models are capable of defraying capital inefficiencies, but Whiting does not observe “full-fledged buy-in to most of those structures”, adding that in general there doesn’t seem to have been “any huge successes outside of individual firms micromanaging balance sheet”.
He also stressed that resource constrained firms are going to struggle with limited funding to build enhancements ahead of regulatory considerations such as T+1 and 10c-1, and operational risk is coming into focus more than ever on the back of Basel III Endgame.
Some operational risks can be “thwarted” with real time data, he noted: “The real time nature of data, technology, automation and straight through processing can certainly help defray operational risk (from either) regulatory measures or reduced capacity to have any latency on information movement throughout the life cycle of a trade.”
On a program level, beneficial owners are increasingly interested in lending outcomes that are more personalized, with an eye on flexibility across the market, Whiting said: “We are certainly working hard to make our lendable assets as attractive as possible…We do that with flexibility, transparency and technology driving efficiency and performance in the program.”
Brooke and Jon will be joining colleagues from Citi, Finadium and State Street on the FISL panel, which takes place in New York from May 8 to May 9. It is our 8th 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.