Intraday securities lending data and government regulation
Intraday securities lending data has arrived in the United States and the rest of the world is soon to follow. This development, while not unexpected, brings a new dimension to how transparency is presented in securities lending markets. While the merits of securities lending databases can be debated at some length, the reality is that the U.S. SEC has been mandated by Dodd-Frank to provide regulations on transparency in the securities lending market by July 2012. We are pretty sure that intraday securities lending data will be part of the first round of proposals.
The SEC faces a tough challenge in defining transparency; while talking about transparency makes for a good sound bite, even industry participants do not always agree on what it means. On one hand, transparency is setting clear policies or knowing what is in a collateral management account. On the other, it might mean benchmarking securities lending returns between providers. Still again it might mean a concept of best execution that extends back to the asset holder and forward to the end-borrower to understand if the loan met their various objectives and held to their risk/reward parameters. The SEC has not yet made their contribution to the conversation, and time is running out.
The market has begun to accept intraday securities lending data as a useful and even important part of trading activities, and both agent lenders and prime brokers are on board. This adoption results in faster markets and more frequent repricing of loans. The first firm to offer the service, SunGard, is well known for its Astec Analytics and Lending Pit data solutions. Other firms are certain to follow its lead, although they may or may not succeed as well for various reasons. One thing is for certain: the securities lending business has changed for good.
When it comes to regulation, intraday securities lending data offers an easy though potentially misunderstood solution for the SEC in their attempts to mandate transparency. An intraday securities lending tape is analogous to a consolidated tape of equities prices; a loan is made at a certain volume and rate, and it appears in a continuous flow of information. Nice idea. The problem as market practitioners know well is that securities loans are not homogeneous products. A term loan from a pension plan that will leave the stock out over a dividend period has different characteristics than an overnight loan from a mutual fund planning to vote its stock next week. While there are some pools of loans that can be seen as standardized or analogous, this information is not distinguishable in your average securities lending data feed covering the entire market. Market practitioners are also adept at arguing the merits of one or another data source as definitive, but we’ll gloss over this issue for the moment.
At the same time, a regulatory mandate for intraday data will be an imposition for three principal reasons. First, it will require securities lending participants to get access to an intraday securities lending feed. Second, it will make the presumption that the feeds really do represent transparency at its finest, a point that market participants are certain to disagree with. And lastly, like any new regulation, it will change the rules of the game for new and established players; there will be a new standard that everyone in the market will now follow for their internal business purposes. We can expect that business models will then evolve to maximize any idiosyncratic advantages that can be grabbed from regulatory change.
However you slice the pie, we think that intraday securities lending data will comprise a core piece of what the U.S. SEC mandates as transparency in the securities lending market. And why wouldn’t they? After all, nearly every market participant now has SunGard and/or Data Explorers, and intraday data should be better than once-a-day data anyhow. The idea of a securities lending ticker is so attractive that a broad swath of the regulatory community can back it with little trouble.
Is intraday data the new de facto definition of transparency in securities lending? No, it isn’t. But it is a version that is easily explainable to non-specialists and to regulators. While the analogy of unstandardized securities lending data to standardized stock exchange rationale does not line up quite right, it is close enough that U.S. regulators will be attracted to the idea. And in the end, if this is how Dodd-Frank mandates transparency for U.S. securities lending markets, with agents and prime brokers adopting it anyhow, this really isn’t so bad.
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