The highs and lows of IMN’s 2016 US beneficial owners in securities lending conference (Premium)

We attended IMN’s beneficial owners in securities lending conference last week in Phoenix, Arizona. The conference was well attended, with an estimated 60 beneficial owners present and some 200 vendors. There were some interesting things said along with some mis-cues. The biggest hanging question was: where is this event heading? Our review is below.

The crowd at the conference was upbeat: securities lending has returned from the gloom and doom and may have a bright future ahead of it. However, as one panelist noted, total revenues will be about flat with small beneficial owners dropping out and large ones collecting more of the pie. No agent lender was thinking to leave the market, a fact noted in a pointed question about how agents were reacting to a changing landscape.
Some choice quotes and observations:

  • “The CCP model doesn’t exist yet that works for us. We don’t do any CCP trades in 2016.” That’s a bad sign for securities lending CCPs, although on a later panel CCP representatives spoke actively about their plans and ideas. The US is really the Options Clearing Corp’s (OCC) market to lose. With US$143 billion average daily volume between dealers in the OCC’s securities lending CCP, they have a volume already built in to introduce beneficial owners and make it a smash hit. They need to take action though: while it is unlikely that they will face competition from Eurex or any other CCP in the near future, there is a possibility that US securities lending market participants will figure out other solutions if no CCP exists. That may make a late entrance much less exciting and/or necessary.
  • 30% of beneficial owners would be willing to lend without indemnification. 70% say no way. Conversely, 37% say that they would be willing to pay higher fees to keep indemnification and 63% say no.
  • Non-cash has the market aflutter, but there is a need for the SEC to approve changes to 15c3-3 that would allow ’40 Act mutual funds, then ERISA plans, to accept equities. There were multiple references to this across several panels. Even without the SEC change, Markit reports that US non-cash for equity lending has gone from 7% in 2009 to 35% in 2015.
  • The biggest problem with money market fund reform for institutional prime funds is the gates. This is no surprise, but a poll confirmed that 68% of beneficial owners saw this as the big problem. Most investors can live with liquidity or redemption fees, but few can live with not being able to pull the plug on their securities lending program and give cash back whenever they want to.
  • The funniest comment we heard: while banks are held back by regulations, other institutions “are not constrained by LCR, NSFR, YOLO…” That brought some well needed levity to a serious topic.
  • EquiLend is going live with Eurex’s Lending CCP. Along with EquiLend’s introduction of One File, that presents additional competition for Pirum.
  • The most frequent topic of conversation outside the panels was the potential of peer-to-peer lending, also called agency prime brokerage, where a beneficial owner is exposed to the credit of a hedge fund borrower directly without a prime broker taking a principal position.
  • A recurring problem with this event is that there is substantial repetition amongst the panels and not a lot of top-level coordination. That makes attending all the sessions a bit of a drag, sorry to say. There seems to be enough content for one day. The flip side is that agent lenders might need two days to get all their business is. IMN management will, we imagine, need to address this issue yet again. The networking is great; the panels individually are all good but collectively can wear you down.
  • The tech panel was out of place. It was a great panel but the panelists, all very competent (including our own former colleague Jonathan Cooper), were speaking to an audience that wasn’t invested in the topic.

Which leads us to the big hanging problem of IMN: what is this event for? It started out as purely a securities lending event, but with dwindling beneficial owner attendance, and in truth fewer US beneficial owners that are actively engaged in lending, IMN added on the collateral management title. But really, collateral management is a different audience and one that may not yet have enough of a buyer ecosystem in the US to warrant an event of its own (see: Fleming’s various efforts to launch a regular US collateral management conference that rivals their European event). Fewer beneficial owners combined with wondering panel topics at IMN means frustrated sponsors, which in turn means a question about the longevity of the conference in the current form. IMN holds the crown – this is their 22nd annual securities lending event – but the secret formula for success may need some new ingredients.

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