Four Guidelines for the Future

I am pleased to include the presentation that Mark Faulkner of DataExplorers gave at the IMN Conference last week.  After moderating the Industry Leaders panel, Mark gave quite a performance, storming through this PowerPoint: "The Future of Our Industry" at rapid-fire pace.  It set an excellent framework for the conference and I just wanted to reinforce and comment on some of his summary slides.  You can access the presentation here: Download MCF IMN

It's not the end of the world as we know it
However, it is a signal that some things need to change.  Beneficial Owners last week were crying out for more education.  Many felt that they didn't understand the risks in the business as well as they should have, and wanted/needed to know more.  It's up to the industry at all levels to improve that process.  In addition to the obvious cash reinvestment discussions, education must include indemnifications: what they cover and how they vary by provider.  Honest cash versus non-cash collateral discussions are essential.  I recently coined the phrase "Cash is King, but Correlation is Critical" in a recent videocast for Global Custodian Magazine.  I, along with others in Europe have been pushing non-cash collateral as an important feature for lenders in attracting borrowing demand and as a critical risk management tool for them.  It has never been more obvious or more important.  I gave a presentation to the Department of Labor in Washington more than a decade ago at the invitation of the RMA that covered non-cash as part of that. 

Don't bury your head in the sand
Demand explanations, be challenging to your providers and market counterparties and search out alternatives.  Understand where you are and where you want to be.  My feeling is that a lot of people last week are crossing their fingers and hoping they can ride it out and with a bit of luck avoid problems. That isn't a strategy for long-term success.

You are not prisoners
I had a number of conversations with people (including other consultants) before going to Arizona, then at the conference and since the event.  Many people feel they are trapped in their programs and are forced to carry on as before.  While it may not be simple or straightforward to make changes, and it may not be possible for most or all your program, there are things you can do to alter your profile and risk.  Again, talk to your providers first, and think outside the box.

This is serious not fatal
Sure, changes need to be made, and there are definitely casualties - with no doubt more to come.  Yet the industry has survived because it is a critical part of the capital markets.  Short selling goes back hundreds of years and (unsuccessful) regulatory short selling bans stretch back almost as far.  Despite the temporary actions of regulators and hysteria of the uninformed scare-mongerers and media hounds, the markets need securities lending and it seems that proper deliberations are replacing the knee-jerk responses of the past nine months.

However, the capital markets don't necessarily need a securities lending business that looks exactly as it did in 2006.  The time for change is now, and it is most likely to come in small changes in practice and procedure and the industry will be changed in aggregate in a way that won't necessarily be clear until we look back in future. 

Many pundits who were predicting an upswing in the stock markets for the second half of 2009 are now pushing that back into 2010.  It will be interesting to see how things stand from a securities lending point of view when we look back from the IMN 2010 conference.