Markit forum: healthy tension between buy and sell sides
14 March 2013 London
Image: Shutterstock
Markit Â鶹´«Ã½ Finance hosted more than 150 people representing the great and the good of the European securities financing market in London for its 16th forum, with the first discussion being a hot debate on the state of the lender and borrower relationship.
Last year, it was agreed that it was the regulators that were really driving the agenda, with one head of repo noting that the industry is at a massive inflection point. From a structural perspective, each person along the securities lending chain needs to be able to make money if the industry is to prosper.
This year, a panellist stated that a healthy tension remains between borrowers and lenders as they to try seek value for clients.
Despite the major prime brokers having diversified their businesses with functions such as synthetics, delta one and swaps driving alternative routes to market, the overall relationship with lenders had not been adversely affected, according to a head of prime finance and delta one.
However, the securities lending value chain came in for some criticism from a different delta one head for being rigid, not allowing niche players and failing to adapt to changes in regulation.
On the question of a trade repository for the industry, a panel agreed that it was inevitable and that it will probably take about five years. On that basis, there is a great opportunity for the industry to come together voluntarily, or regulators will impose their version. However, one panellist warned that a trade repository needs to focus on positions and exposure rather than be distracted by individual transactions.
The old adage 'collateral is king' needs updating, with cash now usurped by collateral. A Markit survey of its consulting clients revealed a split with 40 percent of beneficial owners questioned being less flexible towards collateral upgrade trading whereas 40 percent are now more flexible.
One panellist that explained the decision to lend is not necessarily within the lender’s control as it depends on where the beneficial owner is based as well as the appropriate regulatory regime, which creates challenges for borrowers.
Furthermore, some large lenders are more concerned with overall risk-adjusted returns from lending and are less interested in new structures such as collateral transformation.
Despite the widening definition of eligible collateral, no one knows how much will be needed and the numbers that are mooted are still huge. Conference attendees could not agree, with 41 percent voting that it could amount to less than $1 trillion while the same amount thought between $1 trillion and $4 trillion, and the question of how many new central counterparties will crop up to service the industry still remains.
A few panellists thought that securities finance had been solving the collateral question for decades and that regulator concerns stem from new players, such as treasury functions, failing to price collateral correctly and take appropriate risk decisions.
But another panellist countered that some collateral transformation involves buy-side institutions managing their own collateral as European Â鶹´«Ã½ and Markets Authority regulations require different pools of collateral for each type of activity with re-use of collateral not permitted.
A different panellist noted that collateral is becoming its own asset class for the buy side and that they need help getting their arms around the operational challenge.
Yet one panellist took a different tone, contending that the collateral shortfall debate is overhyped and that one of the unintended consequences is that buy-side players that find the whole derivatives market too complex will simply pull back.
Last year, it was agreed that it was the regulators that were really driving the agenda, with one head of repo noting that the industry is at a massive inflection point. From a structural perspective, each person along the securities lending chain needs to be able to make money if the industry is to prosper.
This year, a panellist stated that a healthy tension remains between borrowers and lenders as they to try seek value for clients.
Despite the major prime brokers having diversified their businesses with functions such as synthetics, delta one and swaps driving alternative routes to market, the overall relationship with lenders had not been adversely affected, according to a head of prime finance and delta one.
However, the securities lending value chain came in for some criticism from a different delta one head for being rigid, not allowing niche players and failing to adapt to changes in regulation.
On the question of a trade repository for the industry, a panel agreed that it was inevitable and that it will probably take about five years. On that basis, there is a great opportunity for the industry to come together voluntarily, or regulators will impose their version. However, one panellist warned that a trade repository needs to focus on positions and exposure rather than be distracted by individual transactions.
The old adage 'collateral is king' needs updating, with cash now usurped by collateral. A Markit survey of its consulting clients revealed a split with 40 percent of beneficial owners questioned being less flexible towards collateral upgrade trading whereas 40 percent are now more flexible.
One panellist that explained the decision to lend is not necessarily within the lender’s control as it depends on where the beneficial owner is based as well as the appropriate regulatory regime, which creates challenges for borrowers.
Furthermore, some large lenders are more concerned with overall risk-adjusted returns from lending and are less interested in new structures such as collateral transformation.
Despite the widening definition of eligible collateral, no one knows how much will be needed and the numbers that are mooted are still huge. Conference attendees could not agree, with 41 percent voting that it could amount to less than $1 trillion while the same amount thought between $1 trillion and $4 trillion, and the question of how many new central counterparties will crop up to service the industry still remains.
A few panellists thought that securities finance had been solving the collateral question for decades and that regulator concerns stem from new players, such as treasury functions, failing to price collateral correctly and take appropriate risk decisions.
But another panellist countered that some collateral transformation involves buy-side institutions managing their own collateral as European Â鶹´«Ã½ and Markets Authority regulations require different pools of collateral for each type of activity with re-use of collateral not permitted.
A different panellist noted that collateral is becoming its own asset class for the buy side and that they need help getting their arms around the operational challenge.
Yet one panellist took a different tone, contending that the collateral shortfall debate is overhyped and that one of the unintended consequences is that buy-side players that find the whole derivatives market too complex will simply pull back.
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