Stock Lending Today - An Industry Under Siege!

AQS and Data Explorers announce product integration

The following is a press release issued jointly by the two organisations. The integration for mutual customers make perfect sense and should enable traders to make better decisions. Well done.

NEW YORK, NY and London, UK - June 24, 2009 - Automated Equity Finance Markets (AQS), a wholly owned subsidiary of Quadriserv, Inc., today announced a new agreement under which its AQS™ securities lending marketplace will integrate with unique securities lending data and analysis products from Data Explorers (www.dataexplorers.com).  Customers from both organizations will benefit from productivity tools that enhance securities lending portfolio management, including new market data and analytical capabilities. "Working closely with Data Explorers builds on our strategy of aligning the AQS securities lending marketplace with key industry platforms for the benefit of our mutual customers," commented Gregory DePetris, Co-Founder of Quadriserv.  "In this case, participants on the AQS platform, which brings exchange-like, central counterparty functionality to the securities lending market, will benefit from Data Explorers' proven ability to deliver timely, insightful securities lending data and analytics capabilities.  We are excited about today's announcement, and look forward to working closely with Data Explorers in the months to come to expand the services available to our customers."  Donal Smith, CEO, Data Explorers commented, "We are very pleased to enter into this relationship with AQS.  Customers will benefit from the efficiency, transparency and accessibility of the AQS market integrated with Data Explorers' comprehensive timely data and analytics for the global securities lending market."Initially, the relationship will include the joint distribution of market data and analytics products for mutual customers.  As part of the offering, subscribers of Data Explorers and AQS Market Data will be able to view information from both providers in parallel, allowing users to make better informed investment decisions.  About AQSAutomated Equity Finance Markets, Inc. (AQS), a wholly owned subsidiary of Quadriserv, operates AQSTM, the global leader in providing centrally-cleared securities lending services that aim to maximize liquidity, access, credit and transparency, while mitigating systemic risk.  Through its relationship with The Options Clearing Corporation, among other leading industry partners, AQS provides central counterparty guarantees and anonymity to all transactions handled in the U.S., and will expand its services into the European market through its relationship with Eurex Clearing.  AQS operates as a FINRA member broker-dealer and a SEC regulated alternative trading system (ATS).  For more information about AQS, please visit www.tradeaqs.com. About QuadriservSince its inception in 2001, Quadriserv has delivered transformational market structure changes to the securities lending industry.  Quadriserv's customers, which include beneficial owners, agent and custodial banks, broker-dealers, asset managers and hedge funds, benefit from market data, cutting-edge technology and centralized clearing credit solutions.  The Company has also partnered with leading firms and individuals within the industry to bring equal access, centralized credit, greater transparency, and a fully integrated technology infrastructure to the equity securities lending marketplace.  For more information, please visit www.quadriserv.com. About Data ExplorersData Explorers(www.dataexplorers.com), based in New York and London, is the world's most complete resource for data, analysis and insight into short-selling and securities financing. Data Explorers' unique dataset is sourced daily from the securities lending desks of top global lending firms.  Data Explorers is the go-to source for financial institutions, enhancing decision making with global short-side intelligence. Sent from my BlackBerry® wireless device

ISLA APPOINTS KEVIN MCNULTY AS NEW CHIEF EXECUTIVE
The International Securities Lending Association (ISLA) has appointed Kevin McNulty as its new Chief Executive from 1 August 2009. This follows the resignation of the current Chief Executive David Rule to take up a position at the Financial Services Authority. Kevin was formerly a Managing Director at Barclays Global Investors and a previous Chairman of ISLA. ISLA Chairman James Templeman said, 'I am delighted to appoint Kevin as ISLA CEO. He has a deep knowledge of the market and the personal qualities needed to be successful in the role. I am sure the Association will strengthen further under his leadership'
Sent from my BlackBerry® wireless device

On the road to Barcelona

I am writing this as I sit on the plane, on my way to the 18th Annual ISLA/RMA conference on securities lending. I think that I have been to 15 of the 18 events, and I can't recall a more important nexus for the industry.

Hedge funds remain the single most important driver for the growth of the business.  Hedge fund data from May have finally shown a turnaround in fortunes for the alternatives industry. Performance is up virtually across the entire spectrum of funds, new investments have exceed redemptions for the first time this year and some sizable new fund launches are in the works. Yet one month's figures do not constitute a trend.  In addition to the natural challenge for performance, regulations loom large and ominous for hedge funds around the world. Regulators and politicians in practically every region want more controls, restrictions and reporting.  The impact of these forces is hard to predict at this time, but they will have an effect on the business.

On the morning of last year's ISF awards announcements in September, I suggested in my blog that the winners on the borrower side of the survey enjoy the celebrations but the lenders shouldn't take any notice of the rankings. My feeling at the time was that the past winners would perhaps for the first time not be a useful guide to future winners and that there would be a new order arising. I feel pretty good about that prediction.  I don't think there is a prime brokerage firm out there that isn't grappling with the after shocks of the Lehman default last year. Numerous hedgies have changed and/or added PBs, and many of the switches involved moving their relationships into the US offices of their PB. The original move to providers based outside the US was to take advantage of more commercially oriented leverage arrangements from non-US offices of the prime brokers. However, given the very low degree of leverage this is no longer an issue, and many funds feel more comfortable dealing with future potential insolvencies in the US as opposed to other jurisdictions. PBs are having to re-examine their service and funding models, coming up with different and innovative solutions for their clients. Any provider that hasn't added any new services, arrangements or features over the past 9 months or isn't working on them now is likely to be left behind by the end of the year.

Agent lenders have been on the firing line for much of the past two years as a result of the credit and liquidity crisis that has hit the cash reinvestment side of the business. The core challenge for these agents has been less about the selection of investments and more about their ability to keep the pools funded in a shrinking market. Forced sales generally have unfortunate outcomes. Agents who predominantly lend against non-cash collateral have had a growth spurt in business as their clients haven't had cash reinvestment losses and the collateral profile is attractive to the majority of borrowers. The debate about the purpose of collateral - safety net or alpha generator - is surprisingly still in its infancy. Borrowing demand is down from peak levels a couple of years ago so lenders have to work harder just to stand still.

Beneficial Owners that participated in cash programmes ... Hmmm.  Are they the victims in the cash reinvestment story or willing participants until the tide turned against them? Have they been ill-educated and uninformed by their service providers or were they only interested in the bottom line?  "Securities lending in five minutes a month!" Which Ben Owner wants to admit to this approach these days? For those funds that took non-cash collateral, they missed the best of the returns generated by their cash-oriented brethren, and with market volumes down are no doubt well off their best revenue years. I suspect however that this is the group that feels least stressed (depending on how much business they did with Lehman and the type of business).

Further, the issue of electronic trading and central counterparty is finally real rather than an abstract idea for the future. The question here seems to be more an issue of those fighting for the status quo rather than considering whether CCP is a valuable part of the future of the business. Indeed, individual firms have their own best interests in mind in their actions. However, a number of the arguments made against CCPs don't bear up under scrutiny.  Typically it is regulators that are tasked with determining what is best for the wider markets. I'm not sure this an issue the stock loan industry wants to leave solely in the control of the regulators.

Finally, the subject of short selling has never had so much focus as it has over the past twelve months.  Securities regulators, politicians, church hierarchy, day traders, pensioners, corner shop owners and cab drivers have all been given time to air their views, happily accommodated by a media fueled by frenzy.  We have almost emerged from the fog of fear and a more considered and thought-out regime will likely result over the coming months - although it is likely to be different on a country-by-country basis.

All in all, we see a securities lending business that is still huge, and recognised as a cornerstone of the capital markets.  But we also see an industry that is dealing with important fundamental issues that will shape the market for years to come.  What that final shape will look like however, is yet to be determined.

Should be an interesting conference.

(A long post - hope you made it to the end.  See what happens when the flight is delayed and I have too much time on my hands.)

ISLA / RMA Conference - Which subject interests you most?

I am getting ready to go to the conference and was just reviewing the subject matter one more time.  I will be covering the event for Global Custodian Magazine and have been considering which session carries the best potential for stories.  I'm always interested in what you think, so I have listed below the the titles of the different panel sessions.  Which one interests you the most?

If you have any questions or comments you want raised at the event, let me know and I may get a chance to ask them on your behalf.  Drop me an email at roy@stocklendingtoday.com

Regulatory Corner
Last Friday was a busy day for regulatory reports.  IOSCO produced its Final Report on the Regulation of Short Selling.  I haven't had a chance to do anything other than skim it so far.  More in the coming days. 

Friday was also the deadline for public comments to the SEC for Short Sale price tests and circuit breakers.  Over 5,000 submissions were made by interested parties.  My feeling is that the most interesting comments weren't made public .... How You Doin? 

Prime brokerage solutions

I have written in several of my magazine articles that 2008 was a seminal year for the recognition of risk in securities lending.  Lenders have always known there is potential borrower risk and that is why they employ rigorous credit analysis and take additional collateral.  Up popped Lehman and their analysis, processes and procedures were challenged. 

Borrowers have been at a disadvantage, because they have actual, real, daily exposure to lenders due to the excess collateral margin provision.  This concern was assuaged to an extent as lenders were asset-rich institutions  that were unlikely to default.  And then AIG came along again.

Hedge funds have had to trust their assets to their prime brokers but few understood the risks involved with leaving their cash and securities completely under the control of the PB.  Lehman gave them a nasty wake-up call.  Custody of asset positions, surplus cash and re-hypothecation of assets all became important issues for hedge funds whether or not they were clients of Lehman.  In the aftermath of the default, both hedge funds and prime brokers have been searching for solutions to the various risks that suddenly became so obvious last September.

This week saw an announcement by Morgan Stanley that they had established Morgan Stanley Trust N.A., a new trust bank.  Hedge fund clients will be able to hold some of their fully-paid assets in the bank, offering another layer of protection to their hedge fund clients.  This is just one answer to the issue.  I have heard from a number of funds, PB’s and third party providers that are all working on their own solutions to the issue.  One thing that is certain is that the PB model of 2010 will be different to the version that prevailed in 2008 and before.   

Observers of the securities industry will be reminded that 11 years ago MS sold Morgan Stanley Trust Company to Chase Manhattan Bank.  Of course, MSTC was a “traditional” global custodian rather than a hedge fund focused trust company.  As I wrote in the blog last year, global custodians had a handle on the asset segregation issue under control in the early 1990’s.  I was working at Chase then, and the impetus for investor focus on safety of assets was the run on US banks at the time.  History clearly repeats.

P.S. 

By the way, this is my 150th post, so I guess that is some kind of a milestone.  I had wanted to start the blog for some time, but I kept putting it off.  By mid-August last year, virtually all the coverage on hedge funds, short selling and securities lending was negative.  I wanted to balance it out a bit, and explore some of the issues in the industry.  I’ve really enjoyed doing it, and I have been somewhat frustrated recently.  I have so many different projects under way, it has often been a struggle to find the time.  I hope you have got some value out of it, I know I have.