How did the launch of your new securities lending web platform come about?
We wanted to offer customers the latest data delivery technology, a means to interact with them, and will in future allow them to interact with each other. That’s really the backbone to the launch of our new web portal, which will be going live to our customer base over the next week.
The portal takes all of the securities finance information that we already have and displays it out in a more flexible and tailored fashion which can be configured to reflect the workflow of the user be they on the lender or borrower side. Markit has extensive specialised data sets that are relevant to the stock loan community. We have selectively integrated some of these, such as dividend forecasting into the core securities lending offering to provide customers more contextual information and we plan to further integrate other relevant Markit data such as liquidity scores and validated corporate actions so users can factor availability into their decision making process.
The portal is also very scalable—if a client has an idea for an enhancement, it doesn’t take that long for us to incorporate their feedback and build a new module. As businesses are becoming more complex, and regulatory change abounds, clients are asking for more. Our product development is defined by our customers and we have spent over six months in consultation with them to provide this new infrastructure.
We are now seeing a shift in practices from the old days of stock loan, to the new reality of securities finance.
The three worlds of stock loan, repo, and collateral management have essentially converged and we are seeing that our clients are beginning to merge these functions under a single collateral management desk. Our customer’s world is becoming more complex and they have more specialised requirements, so our new platform is a way for us to meet those needs and prototype release far more quickly.
In the last forum, a survey found that collateral may be usurping cash as king—are you expecting the same results this year?
Broadly, yes. What is beginning to emerge is that the preference is for fixed income as well as just cash. What we’ve been hearing from the customer base that there is increased appetite for term trades which fits the regulatory agenda.
What they might, for example, consider doing is borrowing bonds, which they can then use as collateral to borrow cash. And they will want their collateral term to match their cash term. A number of the big beneficial owners are willing to engage in these term trades for a month, three months, or perhaps even longer. That is good for them because they get paid a bit more, and it’s good for the people who are borrowing because collateral is being locked up.
That will become more important if we do enter a phase where interest rates begin to rise; more term is ultimately what the regulator wants to see. They don’t like the idea really of most of the funding being run overnight. They would much prefer to see a longer book.
How has the stock loan market inspired or affected these collateral changes?
The stock loan market is a kind of an informal collateral transformation engine. There was a lot of excitement in the last couple of years over collateral transformation swaps, but those haven’t really emerged much as formal products. This is because the stock loan market can do a lot of that especially in fixed income, without any kind of product packaging premium.
As for estimates of the collateral that is going to be required, over the last year I have heard figures anywhere from $600 billion to $15 trillion—with the median being about $2 trillion. That seems to have changed—we’re closer to $3 or $4 trillion as the expectation, and most of that will be in the form of government bonds of one type or another.
People are still seeing demand for collateral, but the one elephant in the room is quantitative easing. If it was to reverse, governments around the world have acquired large stocks of government bonds, so they could end up pumping those back into the market, which could help to alleviate the shortage.
We’re definitely seeing that this is real, and is happening—but possibly not in the formalised way that everyone was expecting.
What can we expect from the forum?
The forum is comprised of three panels. The first is taking a look at where we are in the securities financing market, focusing quite specifically on things like the European regulators’ requirement for the trade repository, and reactions to regulations generally. This panel will involve those from both lender and borrower sides.
We then have a panel specifically on securities financing, with people not just from stock loan and repo, but also from collateral management. They will be hopefully confirm our views on collateral, but you never know! Then we will have a third and final panel, which will look at the opportunities and challenges going forward. What I expect is going to emerge out of this discussion is confirmation that there is more focus on fixed income now, because people believe that there is money to be made there.
If interest rates do begin to move up it is not good news for bonds, and they are more likely to be shorted through the securities lending market. Equity shorting has been curtailed over the last 18 months. However, if equity markets go through a choppier phase, again this type of shorting will begin to pick up. The background is potentially benign for the securities finance industry, but specific issues such as the cost of indemnities will continue to niggle.
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