Some agent lenders and some repo dealers are converging in their service offerings for clients

In recent surveys of agent lenders and US repo dealers conducted by Finadium, parts of each group say that they are headed towards similar or the same end goals in the services they offer clients. The language can be nuanced but the theme keeps showing up in multiple ways.

The area of convergence is providing liquidity, collateral and advisory services that help clients expand out of a silo for one trading product and into optimizing funding and financing across the firm. In our 2022 Agent Lender Survey, we heard that a segment of agents are asking themselves “how else can client liquidity needs be supported?”

The end-goal for larger clients in securities lending is to internalize liquidity sources. To get there, clients are working with agents to pick and choose what they need to supplement internal capabilities. For agent lenders, the theme of clients building out central funding units supports the internal credit risk analysis that beneficial owners will need to engage comfortably in Peer to Peer. There is also a general shift in thinking about the role and risk of securities finance that occurs in the build-out of central funding; securities lending and cash and collateral management should all be part of the same process.

Agents are now offering modular services to support clients on their journeys, wherever they are starting from. If a client is weak on credit risk management, then indemnification for Peer to Peer may be important. If a client has a strong credit risk team but weaker operations, then outsourcing the operations and valuation of derivatives trading may be useful. There will continue to remain a segment of agent lenders with clients who are not interested or legally permitted to engage in financing services outside of agency lending – the entire industry is not marching together – but for those agents thinking about expanded services, the financial impact can be meaningful. In Peer to Peer for example, the 56% of agents who said they are working on product development think that the top 10% of their clients are already or will soon produce 90% of their division’s revenues.

Our report on US Repo Conditions and Market Structure in 2023 found a similar line of thinking: some repo dealers say that they need to focus on providing value beyond trading. This may include cash management and collateral trading, support for UMR and help in moving collateral management to the front office. This sounds a lot like what some agent lenders want to do also. Repo market participants say that for certain, there will be more electronic trading and settlement integrated with trading flows. An increased standardization of legal agreements, possibly focused on the GMRA, could help, as well as possibly taking up the International Swaps and Derivatives Association’s (ISDA’s) proposal for a single agreement across OTC derivatives, securities lending and repo.

In a few cases, the agent lenders and repo dealers we spoke with are part of the same global organizations. As collateral optimization is becoming less of a nice-to-have and more important for performance and risk management, we would not be surprised to see re-orgs that merge the modular agency lending services of a Securities Services division with the repo advisory of a broker-dealer trading desk, which would further speed integration across economically similar products that still largely operate under different siloes. Both sides see the services that clients need and will follow them to the logical conclusions.

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