We were at the IMN Beneficial Owners’ Securities Lending Conference in Phoenix earlier this week. There were a number of great discussions. Not surprisingly, several panels reviewed key regulatory issues facing the industry. Our commentary is in bold.
The overall theme was “the outlook continues to be uncertain”.
- Dodd-Frank sets counterparty exposure limits (25% of capital stock and surplus, unless deemed a “Major Counterparty” – defined as total consolidated assets > $500 billion — in which case the limit is 10%). Managing these limits, which apply to affiliates as well, will be tricky. It may push business to more friendly jurisdictions.
- The Volcker Rule will impact, among other things, the comingled fund structure. Implementation is scheduled for July 2012, but there are a lot of comments to get through before then. Comingled funds may have to be registered investment vehicles, which will be a headache. Individual cash accounts may be an alternative, but these are expensive. The Volcker rule started out as a simple concept, but it didn’t end that way. That is what happens when the Fed, SEC, FDIC, CFTC and OCC are all involved.
- Title 9, Section 984 of Dodd-Frank mandates greater transparency in securities lending. The rules are scheduled to be released in July 2012 but there was little confidence that this date would hold. This is one to watch. Securities lending is lumped with “shadow banking” and there is a lot of pressure to shine a bright light there.
- Orderly Liquidation Authority (OLA): there are open questions about what transactions would be moved to a bridge entity versus staying in the bankrupt entity. Timing of stays and practical application is tricky, especially in tri-party with the unwind/rewind compression. Our sense is that OLA is the “big stick” in the “speak softly but carry a big stick”. Not sure if it ever will get used. The interaction between OLA and SIPC stays were discussed, although we were more confused after than before.
- Basel III could mandate substantial RWA for indemnifications. We understand that the interpretation is still a work in progress. If it goes badly for the industry it will be a game changer.
- ESMA short selling bans and locate regulations: still out there. It’s hard to find any academic research that supports short selling bans, but they make good sound bites.
- Dodd-Frank Section 984 puts securities lending regulation under the SEC. It still isn’t clear how the SEC will exercise their authority.
These issues have all been kicked around for a while. It is somewhat disconcerting that they continue to hang, like Damocles’ Sword, over the collective heads of the industry. The impact is to be mostly felt on the demand side, but will inevitably flow through to pricing and liquidity.