The Finadium conference: some musings on the future of securities lending

The Finadium conference happened on Tuesday, March 5th, delayed due to Hurricane Sandy. There was a big crowd and it was great to see so many familiar faces (and of course new ones too). Finadium Managing Principal Josh Galper made some projections on the future of securities lending in his opening presentation.

1)    On collateral transformation trades: cash lenders need more incentive to take in alternative repo assets. Returns need to be a lot higher. Without that, collateral transformation stops in its tracks. Repo dealers however are unlikely to go as high as cash providers really want.

2)    Dividend arb is going away for UCITS, mutual funds and other private funds – the industry needs to plan for 20% of current beneficial owners to potentially drop out of securities lending as their non-dividend arb trades don’t support their continued engagement.

3)    There will be fewer but more committed beneficial owners active in the market. Those who stick it out will see higher returns and greater attention paid to them by agents. More committed clients are smarter clients, and smarter clients make both themselves and their agents more money.

4)    Indemnification is the lynchpin to understanding where securities lending is going. If rules are changed forcing greater capital to be allocated to sec lending it will raise the cost of agents doing business. Agents can either price in indemnification, absorb the cost themselves, or offer a product without indemnification. Adding the extra cost may make trades unattractive to beneficial owners. Going without may be contrary to state law or board guidelines. Absorbing the cost — well that is a tough sell. In any event, it will force a reevaluation of the business. Timing: probably in the next 6 to 12 months.

5)    Dodd-Frank 165E, which regulates exposure to financial institutions, may have a profound impact on securities lending. Managing those exposures will be very complicated indeed.

We thank everyone who attended the conference and especially the panelists. The discussion was often lively and always interesting.

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