Beneficial owner conference: absolute regulation disrupts absolutely
31 January 2013 New Orleans
Image: Shutterstock
The IMN Beneficial Owners鈥� International 麻豆传媒 Lending Conference in New Orleans kicked off with a panel on the five issues that beneficial owners need to focus on in the current regulatory and economic climate.
Regulation dominated the panel鈥檚 update for beneficial owners鈥攁nd the conference overall鈥攚ith Mark Payson of Brown Brothers Harriman saying that securities finance is in 鈥減retty good shape鈥�, but regulations are negatively affecting the financial services industry as a whole.
Paul Wilson of J.P. Morgan pointed to Basel III capital requirements and Rule 165(e) of the US Dodd-Frank Act as particular concerns for beneficial owners. He said that indemnification could look very different if the rules go through as they currently stand. Bill Kelly of BNY Mellon agreed, saying that 鈥渢he cost of this service is only going to increase鈥�.
But Jason Peter Strofs of BlackRock was more positive. He said that the relevant regulators are receiving lots of feedback and 鈥渟eem to be listening. He is 鈥減retty optimistic that the rules will change鈥�.
A panel highlighting specific regulations followed, and the US SEC, Financial Industry Regulatory Authority and Federal Reserve Bank of New York were all represented, although disclaimers made it clear that the panel members鈥� views were their own.
Explaining where her agency is coming from when it looks at securities finance, Theresa Hajost said that the US SEC is a market regulator that cares most about investor protection, rather than systemic risk, which is the mandate of the Financial Stability Board (FSB).
She said that 鈥減eople are very concerned about the consistency of regulations鈥�. Indeed, her agency is keen to avoid creating regulatory arbitrage opportunities.
When securities lending was first practiced, definitive agreements between counterparties that are common today were not used, according to a panel of experts looking at the practical applications of regulations.
Moderator Tim D'Arcy of SunGard Astec Analytics used this to stress that the industry should not be afraid of new regulations. 鈥淲e shouldn鈥檛 look at regulation as a negative or as the end of the world as we know it.鈥�
The panel took an in-depth look at the industry鈥檚 drive towards greater transparency, with Anita Ryan of eSecLending saying: 鈥淲e鈥檝e come so far with transparency as an industry, but more regulation is coming.鈥�
Ryan pointed to the US SEC鈥檚 mandate to encourage more transparency in the industry and the FSB鈥檚 proposals, which include the possibility of using surveys and trade repositories to make markets less opaque, as evidence to back up her prediction.
The FSB in particular wants a host of data sets, including the amount on loan, asset class, and the number of custodians used, to be reported in a bid to make the securities finance industry more transparent.
Anthony Toscano of Deutsche Bank said that his firm already shows all of the FSB鈥檚 desired data sets, but D'Arcy stressed caution, saying: 鈥淒on鈥檛 always think more is better.鈥�
He said that beneficial owners do not need to insist on receiving daily reports with all of this information from their agent lenders if they look at or use it once a month.
A panel of representatives from prominent beneficial owners, including the State of Louisiana Department of the Treasury and Franklin Templeton, looked at how to earn revenue in a risk-adjusted fashion.
John Broussard of the State of Louisiana Department of the Treasury said that an important lesson to be learned from the financial crisis of 2008 is that markets are changing鈥攓uickly and constantly鈥攁nd they need to look at different ways to earn revenue as a result.
鈥淚t is inconceivable that you can just stick your head in the sand and say this is what we鈥檙e always going to do and we鈥檙e never going to do anything different. Even for [a beneficial owner] as conservative as we are and as historically tied to one programme as we are, [we need] to test the waters elsewhere to see if what we鈥檙e doing is right for us and whether there鈥檚 anything better out there.鈥�
鈥淚t鈥檚 inconceivable that I could sit here and say we鈥檙e just going to do it one way from now on, and I don鈥檛 think anybody could say that. I think the game is changing constantly and it鈥檚 changing quicker now than it ever has.鈥�
Cash reinvestment came under the microscope in another panel. Markit 麻豆传媒 Finance鈥檚 David Carruthers said that there is a preponderance of non-cash in US-domiciled funds, and this trend is likely to continue.
While cash remains king, it is important that market players practice collateral flexibility, because it is 鈥済ood for the health of your programme鈥�, said Carruthers.
Regulation dominated the panel鈥檚 update for beneficial owners鈥攁nd the conference overall鈥攚ith Mark Payson of Brown Brothers Harriman saying that securities finance is in 鈥減retty good shape鈥�, but regulations are negatively affecting the financial services industry as a whole.
Paul Wilson of J.P. Morgan pointed to Basel III capital requirements and Rule 165(e) of the US Dodd-Frank Act as particular concerns for beneficial owners. He said that indemnification could look very different if the rules go through as they currently stand. Bill Kelly of BNY Mellon agreed, saying that 鈥渢he cost of this service is only going to increase鈥�.
But Jason Peter Strofs of BlackRock was more positive. He said that the relevant regulators are receiving lots of feedback and 鈥渟eem to be listening. He is 鈥減retty optimistic that the rules will change鈥�.
A panel highlighting specific regulations followed, and the US SEC, Financial Industry Regulatory Authority and Federal Reserve Bank of New York were all represented, although disclaimers made it clear that the panel members鈥� views were their own.
Explaining where her agency is coming from when it looks at securities finance, Theresa Hajost said that the US SEC is a market regulator that cares most about investor protection, rather than systemic risk, which is the mandate of the Financial Stability Board (FSB).
She said that 鈥減eople are very concerned about the consistency of regulations鈥�. Indeed, her agency is keen to avoid creating regulatory arbitrage opportunities.
When securities lending was first practiced, definitive agreements between counterparties that are common today were not used, according to a panel of experts looking at the practical applications of regulations.
Moderator Tim D'Arcy of SunGard Astec Analytics used this to stress that the industry should not be afraid of new regulations. 鈥淲e shouldn鈥檛 look at regulation as a negative or as the end of the world as we know it.鈥�
The panel took an in-depth look at the industry鈥檚 drive towards greater transparency, with Anita Ryan of eSecLending saying: 鈥淲e鈥檝e come so far with transparency as an industry, but more regulation is coming.鈥�
Ryan pointed to the US SEC鈥檚 mandate to encourage more transparency in the industry and the FSB鈥檚 proposals, which include the possibility of using surveys and trade repositories to make markets less opaque, as evidence to back up her prediction.
The FSB in particular wants a host of data sets, including the amount on loan, asset class, and the number of custodians used, to be reported in a bid to make the securities finance industry more transparent.
Anthony Toscano of Deutsche Bank said that his firm already shows all of the FSB鈥檚 desired data sets, but D'Arcy stressed caution, saying: 鈥淒on鈥檛 always think more is better.鈥�
He said that beneficial owners do not need to insist on receiving daily reports with all of this information from their agent lenders if they look at or use it once a month.
A panel of representatives from prominent beneficial owners, including the State of Louisiana Department of the Treasury and Franklin Templeton, looked at how to earn revenue in a risk-adjusted fashion.
John Broussard of the State of Louisiana Department of the Treasury said that an important lesson to be learned from the financial crisis of 2008 is that markets are changing鈥攓uickly and constantly鈥攁nd they need to look at different ways to earn revenue as a result.
鈥淚t is inconceivable that you can just stick your head in the sand and say this is what we鈥檙e always going to do and we鈥檙e never going to do anything different. Even for [a beneficial owner] as conservative as we are and as historically tied to one programme as we are, [we need] to test the waters elsewhere to see if what we鈥檙e doing is right for us and whether there鈥檚 anything better out there.鈥�
鈥淚t鈥檚 inconceivable that I could sit here and say we鈥檙e just going to do it one way from now on, and I don鈥檛 think anybody could say that. I think the game is changing constantly and it鈥檚 changing quicker now than it ever has.鈥�
Cash reinvestment came under the microscope in another panel. Markit 麻豆传媒 Finance鈥檚 David Carruthers said that there is a preponderance of non-cash in US-domiciled funds, and this trend is likely to continue.
While cash remains king, it is important that market players practice collateral flexibility, because it is 鈥済ood for the health of your programme鈥�, said Carruthers.
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