The conversation on the new securities lending CCP model is changing – its not so much in the future tense anymore but is moving to the present. Our panel at IMN’s Beneficial Owner’s Conference in London yesterday cemented that fact. But how soon is too soon to actually expect securities lending CCPs, that allow beneficial owners to participate directly, to be regular fixtures in the market?
Our IMN panel asked the audience about their support of securities lending CCPs and discussed the topic amongst the panelists. From the audience poll, around 33% were supportive of CCPs, about 30% were unsupportive and 37% were neutral. Participants in the poll were mixed among beneficial owners, agent lenders and some others, so its fair to say that this is not a representative industry sample, but a large audience clocking in at 33% supportive and 37% ready to go with the market seems meaningful to us.
Responding to when securities lending CCPs would be a reality, the panelists (including two borrowers and two agent lenders) said that trades would go live between now and the end of 2015. That’s in the next 16 months. Only one panelists thought that the time frame was more towards three years. We compare these comments to those made at our March 2014 Finadium annual conference in New York, where we were genuinely surprised to hear a panel of US borrowers and agent lenders all agree that securities lending CCPs were going to be a reality for them as well. Of course there are already securities lending CCPs in operation, and the Options Clearing Corp’s average daily volumes have been steading growing. We are talking here about CCPs that are beneficial owner-friendly, however that is defined.
The key to securities lending CCP adoption will typically be the needs of the sell-side. A participant in Finadium’s asset manager survey noted that he had been waiting for the sell-side to ask him to move trades onto a securities lending CCP for two years now. As soon as the call comes in, he will start using the CCP whether he is supportive or just neutral. Meanwhile, 44% of our asset manager respondents said that with a CCP, securities lending indemnification was no longer important. Since Basel III gives CCPs a 2% risk weighting compared to 20% or 50% elsewhere, then CCPs offer the best financial option as soon as borrowers get tight on balance sheet.
On the CCP readiness side, Eurex already has its Specific Lender License, and multiple sources report that the Options Clearing Corp is getting a plan ready to accept the buy-side directly. Some operational issues remain and were cited as a concern, and a lack of mandate from regulators means that agents and borrowers can take their time in evaluating operational readiness and costs. But the CCPs themselves are ready or almost ready.
Nothing here suggests that securities lending CCPs will become the entire market, but rather will offer an efficient option. We asked the audience what percent of the market they expected would migrate to CCPs: about 75% said that CCPs would capture under 40% market share with only 12% thinking that CCPs would amass over 70%. Our panelists agreed, citing issues such as collateral acceptance and their ability to tell beneficial owner clients that their collateral was legally secured by their own firms.
Our conclusion amongst these data points is that 2015 is when CCPs that allow beneficial owners to enter directly start to be used in the market. As a panelist noted yesterday, this is an evolutionary process, and the conversation next year will be different than this year. But to those wondering how the story will turn out, its looks like the writing is on the wall: next year will start the real and applied usage of the new securities lending CCP model.