Finadium content often runs three to six months ahead of the popular news cycle. Here’s what we’ve published for clients lately and here’s what we’ve seen months later.
Sizing the BNPP/DB Prime Brokerage Business
In February 2020, we published a data-driven report, “Leveraged Funds and Prime Brokerage Relationships: Evidence from a New Database,” including four pages specifically on the BNPP/DB tie-up. We found that together, the BNPP/DB prime brokerage business was the fourth largest by client relationships. We said that there wasn’t much overlap between the client bases of the two firms. Presumably Deutsche Bank and BNP Paribas did this analysis as well, and found that they could together capture a wider range of clients as one integrated technology and operational platform than they could individually.
Then in June 2020, the Financial Times published “BNP has Goldman in its sights after beefing up hedge fund business“. Ashley Wilson, co-head of DB prime finance unit and soon moving to BNPP, was quoted as saying “The feedback we are getting is that counterparties definitely want a strong European bank to provide competition to the Americans.” Olivier Osty, head of global markets at BNP, said that “Our combination could be the largest prime broker in Europe and be considered in the top four in the world. This has to be seen, but that is the objective and we will make it . . . We would be trying to compete with Goldman for the third or fourth spot.”
An SA-CCR for Securities Finance
Our research since 2015 has shown the imbalances between OTC derivatives and securities finance transactions on bank balance sheets, notably the Leverage Ratio. This has led to strong growth in the Total Return Swaps business and mediocre growth in securities lending, in particular. In May 2019, we called for an SA-CCR in securities finance. We said that “Maintaining an equivalent framework would suggest that a version of the SA-CCR for securities finance transactions is required. More netting sets, better recognition of collateral and risk, and comparable calculations for RWA would help support liquidity for underlying physical markets.”
Then in January 2020, the European Stability Risk Board (ESRB) suggested… an SA-CCR for securities finance. In “Mitigating the procyclicality of margins and haircuts in derivatives markets and securities financing transactions,” they said that “Reflecting the central importance of SFT markets in transforming collateral, most of the policy options developed in this report are designed to reduce liquidity strains from margins and haircuts during times of stress.” This would create a better equivalency with the derivatives market, and incidentally would make clear the reality that the economic objectives of many SFTs and OTC derivatives are identical. As such, they should be treated the same on the balance sheet.
Central Bank Digital Currencies Rising to the Fore
After years of resistance, we found that central banks have gotten pushed into a corner and are finally getting serious about central bank digital currencies (CBDCs). In October 2019’s “The Fed and the ECB are getting backed into a corner on digital currencies,” we said that “Central banks are now walking in the mine field of a brand new type of monetary activity. It’s big, it’s complicated, and it risks breaking long-held boundaries between central banks, commercial banks, institutional and retail clients. Central banks are conservative by nature and no one should expect a rush, even now, to offer new digital currencies; regulation of big global stablecoins projects will come first. But how long can the Fed and ECB hold out in the face of heavy pressure?”
Then in December 2019 and January 2020, the news cycle was flooded with commentary from ECB President Christine Lagarde how it was time for the ECB to expand its role in CBDC development and potential usage. Resistance and naysaying for years was followed by a serious acceptance and engagement. Reuters quoted Lagarde as saying that ““My personal conviction is that given developments we see, not so much in bitcoin but in stablecoins projects… we’d better be ahead of the curve because there is clearly demand out there that we have to respond to.” The ECB’s January 2020 working paper, “Tiered CBDC and the financial system,” presented some operational blueprints of how their CBDC could work in practice. Meanwhile, the Federal Reserve appears to still be on at the conceptual whiteboard stage.
At Finadium, our business is carefully analyzing the available data and trends and projecting realistic outcomes. For our clients, this means advance thinking about the most important topics in securities finance, collateral and derivatives markets. If you want to get ahead of the news cycle and start to plan not for today, but for three to six months from now, Finadium is a good place to start.