Some additional observations from the IMN Beneficial Owners Conference in San Francisco: dealers predicting the future

The last day of conference sessions are not as well attended as the earlier ones, but that doesn’t mean there isn’t some interesting information. At the IMN Beneficial Owners Conference in San Francisco last week, one panel of predominately securities lenders was asked to predict the future shape of the business.

A sec lender from a major US bank said his firm was comfortable for their clients to trade directly with borrowers and the sec lender providing indemnification. You could almost feel the air leaving the room once he said it. The other panelists were hard pressed to agree or disagree. There were no details provided on how this could work or what it would cost. This would be a major shake up for risk managers at that bank: from everything we have seen and heard, would a bank risk manager be comfortable providing indemnification with a hedge fund as the counterparty? That’s a tough road to cross.

Certainly the dealer would charge for the service, but would the price simply show how cheaply beneficial owners were getting indemnification? Indemnification will absorb different amounts of capital, depending on the volatility of the underlying assets. Maybe the third party indemnification would only apply to low capital trades? Or was this a gentle reminder to those looking at Direct trading or CCP cleared trades that there are no indemnifications included in those models? Direct could be a serious option going forward; more on the pros and cons of that option can be found here.

Another part of the discussion was about diversification. One suggestion was for beneficial owners to expand the number of approved borrowers they deal with. Sound advice and nothing new there. Also included was a recommendation to think about agent diversification. With the industry re-shuffling, shops will be closing (one already has and two have merged) and beneficial owners need to think about whom they deal with. Is the sec lender going to stay committed to the business? Is their business model sustainable? One might be forgiven to think this kind of comment was designed to push beneficial owners toward the big shops who, presumably, have too much of an investment to leave the business. There is a legitimate question in the growth direction of different agent lenders; we tackled that in depth last November in “Transforming the Agent Lender Business Model.”

There was an interesting discussion on pricing. One dealer lamented that despite the regulatory pressures to change pricing, agents still put crazy bids on the table. One person noted that pricing is situational. We wonder if this means some clients will still get aggressive pricing if there is competition for their business? The usual “price is only one factor you should consider” caveat was invoked. If beneficial owners were being re-priced, one panelist suggested that by all means, issue an RFP and see what comes back.

The securities lending business model is in flux and agent lenders will be in flux as well. Some firms are well positioned; others may have reason to be concerned. In changing times, its the more free wheeling conversation at the end of that day that can turn out some interesting viewpoints.

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