Clearstream held its 19th annual Global Securities Finance Summit in Luxembourg last week. Once again it was a huge event with some 850 registrants. There were some important takeaways in both what was said and what was not said. Here are our highlights.
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Innovation vs. Regulation: Michael Cyrus of DekaBank gave a great talk on financial innovation vs. financial regulation. He presented the two in a see-saw dynamic, where innovation is focused on lowering the cost of balance sheet, thereby increasing risk and leverage. Regulation on the other hand seeks to dampen risk and leverage and hence increase the cost of balance sheet. After 2008, the idea is that regulators have sought to roll back some innovations. “Innovation and regulation are two sides of the same coin,” Cyrus said, with liquidity and the availability of market-based funding as key factors.
OTC Derivatives: Philip Simons of Eurex noted that they now receive 2-3 calls a week from banks looking to increase their repo membership to OTC derivatives. The main reason for this is mid-sized banks wanting to avoid capacity constraints at the big dealers. We would add that the ability to cross-margin across repo and derivatives on the Eurex Clearing platform doesn’t hurt. Other panelists noted that firms were “out of time” to prepare for OTC derivatives clearing in Europe. if you haven’t started already, you are in trouble.
Repo: In an entertaining panel, the topic was “highjacked” to now be Funding and Collateral. David Rule from the Bank of England pointed out that minimum haircut rules are targeted towards non-banks, where non-banks are borrowing cash against non-government bond assets. They aren’t meant to be for securities lending transactions. An audience poll revealed that most Summit participants thought that Leverage Ratio would reduce balance sheet availability by 10%-20%. A slim majority thought that CCPs should extend membership to the buy-side as liquidity providers only, as opposed to not offering membership or offering membership as both liquidity and collateral providers.
Securities Lending:: The seclending panel (which I moderated) started with answering the question, “are we the securities lending panel or just a Part 2 of the former repo panel now known as Funding and Collateral.” We found a split between the agent lender/beneficial owner part of the market, which was decidedly securities lending, and the traders/sell-side part, which was pretty much Funding and Collateral. We worked through the evolution of securities lending into securities finance, but clearly not all beneficial owners are ready or interested to go along for the ride. The announcement by Eurex Clearing earlier that BNY Mellon and State Street had joined the Lending CCP answered one important question, which is whether securities lending CCPs would be just sell-side to sell-side or actually lender-to-borrower platforms. If BNYM and State Street can convince their clients to sign on, which it looks like they can in Europe, then the Lending CCP looks viable. An important caveat though is that the Lending CCP currently covers seven markets, but lenders might trade in 70. Coverage will need to expand to make an impact; this may not happen particularly in the UK for now.
While the mood at times seemed subdued, and the crowd seemed younger than in prior years (or we’re just getting older), the Clearstream event remains an excellent venue for exchanging views across a broad cross-section of Europe’s securities finance marketplace.[/emember_protected ]