Transparency has returned to the forefront of many minds—is securities lending against it?
The securities lending industry as a whole has never been against transparency. It is a little unfair to call it ‘shadow banking’, like it is being kept out of the public eye because participants have something to hide—that is just not true. Transparency, or lack thereof, has been an issue because securities lending came from the back office to the front office and participants never quite caught up with the increased scrutiny that that would engender. There was no conscious decision to conceal anything. I think securities lending participants have since embraced transparency as much as possible because they understand that it is in their interests and will ultimately do them good.
Transparency is next on the agenda for regulators, including the Financial Stability Board—where will securities lending go next?
Services, such as SunGard’s Astec Analytics, have always sought data from securities lending participants, so there are already a lot of market initiatives out there that are creating more transparency. The trick for regulators such as the Financial Stability Board (FSB) is to understand what they want to see and why, and to get to grips with the data once it is collected. While they have provided a blanket list of data points they require to collect, it is still not 100 percent clear as to why, at least for some of them.
Data providers know that the receipt of a million data points on a daily basis is a huge undertaking, so the FSB and others need to know what they are doing and how they are going to analyse all of that data even though they will only receive a summary every month or so. The FSB will bring out what it anticipates will be a practical solution to securities finance data collection in the next year or so. It has gone through the process of asking what data can be provided by participants, so the question as to what it expects to be done with all of that data still remains unanswered and any conclusions brought from the data will be dependent on building some form of trending analysis.
How would the data collection process work?
The preliminary plan appears to be that data will be submitted to regional collectors, probably from trade repositories such as firms like SunGard, which will then be fed to the global aggregator. Data will then be disseminated back to national regulators after having been analysed. So they know where they want to go, which is good, but as I stated before there seems a slight lack of clarity as to why they want every piece of this information. The FSB is looking at this because, understandably and correctly, it wants to prevent another financial crisis. However, it should not be forgotten that in 2008 it wasn’t a securities lending problem, it was a cash reinvestment issue.
The trick will also be what they do with it, because, at least initially, regulators will not have historical data to compare against. How will they identify a trend from only a few months of data? It will have to be an evolutionary process with changes being made, but as an industry I am sure we will cope.
How are industry participants viewing the potential workload?
Transparency was a controversial word a decade ago because some securities lending participants were worried that it would lead to a competitive disadvantage. That has now changed and transparency is mostly welcomed because it can mean that clients can be persuaded to do more business, while regulators and the public can be shown that what they are doing is positive and above board. In other words, when you know more, you understand and appreciate more.
What about in the market itself? Are beneficial owners asking for more information from their agent lenders?
There is much more recognition these days that beneficial owners need to scrutinise their own data. Indeed, beneficial owners have a greater appetite for independent auditing, in terms of both risk and revenue.
It’s also interesting for beneficial owners to look at the cross-fertilisation idea. The regulations that apply to mutual funds and insurance companies differ, but why do they? Should these types of beneficial owners be talking to each other to discuss why this is the case? What can they learn? If one beneficial owner looks at a different type, it might find out why it is performing better or worse, and so it can use that information to assess its business guidelines and behaviour, with a view to adjusting the ways in which it considers risk and seeks returns. At the very least, it would be able to lobby its regulator for change.
The business has moved away from reinvestment towards intrinsic value lending, so it would be interesting for a beneficial owner to find out why a certain type of lender is doing better or worse using certain strategies. Beneficial owners are embracing this idea—they want to see a wider comparison.
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