Stock Lending Today - An Industry Under Siege!

Securities Lending Summit this Friday!

This Friday 27 November I will be chairing the GSL End of Year Summit.  It will be our fourth event of 2009 and we are taking the opportunity to look forward at the prospects for 2010 and examine how the past two years have shaped our future prospects.  The events have been extremely popular as they combine excellent content that is concentrated into a single afternoon of focussed discussion and debate, followed by a networking opportunity after the summit.

The objective of the Summits is to stimulate lively debate and discussion in order that the audience can walk away with ideas and issues to think about and discuss with peers and providers.    I am confident that this End of Year Summit will make an excellent contribution to the series.

Given that our first Summit in January was held to coincide the removal of the short selling ban, it is fitting that we close this event, and the year, with a politician.   Political and regulatory influences are more important than ever, and I am particularly pleased to welcome Mr Greg Hands, MP, Shadow Treasury Minister.  Mr Hands will give us the Closing Address on the day.

For the main body of the conference, we will be looking at both the demand side of the business as well as issues surrounding collateral.  Some of the questions that I have asked panellists to address include:

• Which hedge fund strategies have been successful in 2009 and what is the outlook for next year?
• Which markets, regions or sectors have captured traders’ attention?
• What demands are hedge funds making of their Prime Brokers?
• How have corporations been raising money recently, how does that compare in historical terms and where is funding likely to come from over the coming year?
• What role do Exchange Traded Funds play in the securities lending business?  Do hedge funds use ETFs, and what are the trends? 
• Collateral is a more important subject than ever before.  To some, it is the source of securities lending cash reinvestment losses, for others it was the safety net that protected them against the Lehman default.  What are the issues, trends and challenges for the collateral?
• This year saw the emergence of the first central counterparties for securities lending activity.  While they may be new to our business, they are an integral part of the investment world.  We are fortunate to have Marco Strimer, CEO of SIX x-clear as one of our panellists.  Marco will give us an explanation of what a CCP is generally and help us tie it into its role in this business.

I try to bring you an interesting and fresh group of speakers at each summit, and I think this group will continue to set a high standard of discussion and debate.   While there are some recognised industry commentators, I am pleased to say that there are several new faces that will be appearing on the day. 

There are some places still available and I hope you will be able to join us.  You can register here.

Shuffling Securities Services Players Continues

I’ve mentioned before the dramatic leveling of the playing field in prime brokerage.  New entrants, new alliances and product combinations are all having an impact or may do so in the coming months.  Looking at the same issue from a different angle we can see increasing influence from a geographic perspective.  Canadian banks seem to have weathered the financial market turmoil better than banks in most countries.  Comments on these banks inevitably include positive endorsements on balance sheet, capital strength and counterparty strength.  I like to think that RBC and CIBC were both put into stronger positions as a result of my combined 7 years working for them in the 1980's.

The news last week that Bank of Montreal (BMO) had purchased Paloma Securities is just the latest example of the increasing footprint of the Canadian banks in the securities finance business.  This past year saw the six Canadian banks’ prime brokerage businesses all receive an increasing number of responses in the Global Custodian Prime Brokerage Survey.   Some are newer entrants to prime brokerage or at the smaller end (think National Bank and CIBC) whereas RBC, Scotia and TD have been part of the business for a longer period of time. BMO’s purchase will undoubtedly help improve some of their weaker scores in the securities lending space and aid their effort in growing the PB business.

CIBC Mellon and RBC Dexia are both long established global custodian banks, although both represent evolutionary developments from predecessor businesses.  A few months ago, Scotiabank dove into the Wachovia organisation and scooped up six senior executives to help it create an agency lending product.  In the repo space, TD has been a new entrant into the space in New York this year, filling an obvious gap in their product range.

Compare the Canadian experience with the latest corporate news from Australia in the securities space.  Yesterday ANZ announced the sale of its custody business to JP Morgan.  This follows a horrific period in ANZ’s recent corporate history with their experience in securities lending with the Opes Prime debacle.  They obviously decided it was best to cut its exposure to securities services and focus instead on its recent purchase of ING’s Australian wealth management and insurance business. 

Australia remains one of the less hospitable places for short selling and securities lending.  One of the key requirements placed on traders is that short sales must be disclosed when the order is placed and the exchange releases daily statistics on short sales.  I always wonder what this type of information is meant to convey.  I maintain that information without context is meaningless.  Lets look at the Aussie data by clicking here for an example.  This report is from trading on November 19th and shows 313 stocks where some short selling was reported. The report is a text file rather than a spreadsheet, so I have manually tabulated some figures and I admit there may be a certain degree of error which is mine alone. 

Of the 313 stocks, 59 of them reported short sales of 20% or more of total turnover. Thirteen of the stocks had short sale turnover in excess of 40%.  Of the 13 stocks where short sales were over 40%, 3 of the stocks had price increases on the day, one was essentially flat, 8 stocks fell between 0 and 2% on the day, and only one moved more than 2%, with a dramatic 6.89% drop.  Cumulative short sale positions are also shown, and despite this high daily activity which is pretty consistent, the largest aggregated position represented only 0.37% of issued share capital.  Effectively this is a negligible. 

So what do the numbers tell us?  Truth is, I don’t really know.  Is the short selling volume primarily intraday trading that is covered by the end of day?  Are the trading volumes low in my sample, thus showing short sale activity as disproportionately large?  Are the stocks and the report from the day not representative of the market as a whole?  I don’t really know the answers and I think it is likely that there are a large number of investors in Australian stocks that would also struggle to respond to those questions.  Rules meant to protect investors that can’t actually be used by them represent unnecessary regulatory interference. 

Now I'm really N@ked!

I was on the N@ked Short Club the other evening.  As usual an excellent cast of speakers and a lot of fun.  Have a listen to what I consider to be a somewhat "eclectic" show.  Take an hour of your time, sit back and listen.  This is public radio, providing a service and entertainment to the audience.  I hope you enjoy it ...

Also, don't forget to register for the upcoming GSL End of Year Summit on 27 November.  Click on the banner to the right!

"Host, Dr. Stu considers this one of the best ever (two in a row!) editions of the N@ked Short Club:
excellent guests (securities lending expert, Roy Zimmerhansl of Zimmerhansl Consulting; operational risk doyen, Rajiv Jaitly of Jaitly LLP; Blair Hedges, Head of Operational Due Diligence at Liongate; Bill McIntosh, Editor of Hedge Fund Journal; multimanager veteran, Hal McMath; plus, from the US, Norman Chait, Managing Principal of Nardis Advisors;
heady music (the Orb, the Doors, Velvet Underground, Iggy Pop, Hawkwind and a track from Gong’s fab new album, 2032); on-air therapy via the Emergency Hedge Fund Helpline.

This file may be available for a limited time only. You can use the following link to retrieve the playback:

 

http://dl.dropbox.com/u/1442785/The_Naked_Short_Club_9th_Nov_09.mp3

 

The N@ked Short Club is broadcast on Mondays from 21.00-22.00 hrs., London time

(the show is also replayed from 15.00-16.00 hrs., each Thursday)

on not-for-profit ResonanceFM: 104.4FM in London or accessible worldwide via resonancefm.com"

The N@ked Shorts Club

I am really pleased to be appearing on Dr Stu's N@ked Shorts Club again on Monday. Aside from the inevitable banter, fun and groovy music that is a hallmark of the show, the next broadcast will have more of a focus on risk, due diligence and the lessons learned over the past year.  I hope you will be able to join us ...

"You are cordially invited (next Monday, November 9th)  to listen to a special, silent edition of the N@ked Shorts Club between 21.00 and 22.00 hrs., London time on not-for profit radio station, Resonance 104.4FM (the Guardian calls it “the best radio station in London”; the Village Voice, “the best radio station in the world”): 1 hour of loose talk about hedge funds and the state of the world, plus heady music...Nothing to do with anyone's day job, no promotional agenda, no commercial intent... just light relief in these interesting times.

 

Host, Dr. Stu and his team of expert cognitive behavioural finance therapists will help callers to the Emergency Hedge Fund Helpline (1-800-DISTRESSED) to get in touch with their Inner Arbitrageur...and will be joined by special industry guests (Roy Zimmerhansl, Principal of Zimmerhansl Consulting; Rajiv Jaitley, Principal of Jaitley LLP, Blair Hedges, Head of ODD at Liongate;  Bill McIntosh, Editor of Hedge Fund Journal; multimanager Ace, Hal McMath; plus, astrally projected from the US, Norman Chait, Hedge Fund Guru and Principal of Nardis Advisors)...

 

You can listen to the show within London on 104.4FM.

You can also access it worldwide via resonancefm.com

 

RMA Securities Lending Conference Co-Chairman's Introduction

Last month I had the pleasure of moderating the Central Counterparty panel session at the RMA Annual Securities Lending Conference in the US.  The feedback on the conference has been excellent and I was really pleased specifically with the CCP panellists' presentations, comments and discussion points.  In my view as a moderator this year's conference success was due in very large part to the efforts of the co-chairmen James Slater of CIBC Mellon and Jim Martin of Citibank.  They were invaluable to me in preparing for the panel and recruiting panellists.  I asked Mr Slater for a copy of his introductory remarks as I felt they really captured the spirit of the event.  I have included an extract below for your reading pleasure.

RMA CONFERENCE ON SECURITIES LENDING – OCTOBER 2009

Welcome to the 26th annual RMA conference on Securities Lending.

I’m James Slater, head of capital markets at CIBC Mellon and I’m delighted to be co-chairing this years RMA conference with Jim Martin from Citibank.
   
It’s a great honour to be here, thank you to the RMA Securities Lending committee for inviting me. 

Jim Martin and I would like to thank the dedicated and very talented staff from the RMA – Curtis Knight and his team – because of their work this is going to be a first class conference.

Last year most of us missed this conference because it fell on the heels of one of the most difficult periods the financial markets have ever seen.  For those of you who were here in Florida two years ago, our world has changed dramatically since that time…most of us would say forever.

There are almost 400 registered delegates for this conference. Your personal commitment to attending this event, speaks volumes given the current environment.

These are solid numbers but not unprecedented – what is unprecedented is the number of people who are here in person for this first session – why?

Could it be that our worlds are changing and that we all recognize that understanding our current realities has huge importance?  Only when we have real clarity on our current reality can we develop a plan to move away, presumably to a better place.

Permit me to offer few opening thoughts on the state of our industry.

Within Financial services generally there has been incredible change, challenges, hardships and now great opportunity – our industry is no different. 
·    Several major players have disappeared in our market.
·    Game changers are trying to break into our market and change it forever.
·    Regulators are increasingly focusing on our activities and on our closely connected activities and businesses. 
·    Risk appetites are being re-evaluated and transparency requirements have dramatically increased

Our industry is experiencing unprecedented times.  Are we now at a strategic inflection point in the maturation of our industry?  What does the future hold for us?  Deep questions we all need to consider.

The rate of external change has accelerated significantly - risk, volatility, fear, regulatory change, technology, the growing complexity of institutional money manager activity, and globalization of financial markets are all changing with increasing velocity before our eyes. 

Consider, the pace of change is so great that even if all we want is for things to stay the same, we need to change.
Fundamental questions around trust and transparency have emerged.

KPMG recently completed an institutional investor survey.  The survey had 288 respondents across 29 countries.
The results are stark…
·    77% of investors felt that intermediaries were less trustworthy than politicians – now that is harsh!  Let me repeat…can you believe that!
·    58% of institutional investors think investment managers should provide financial intermediaries with better product training to address the trust issues that intermediaries have.
·    62% of respondents agree that investment managers should give investors more transparency on investment risk.

We live in an increasingly competitive world - to remain competitive and relevant in a changing environment we need to constantly adjust and change ourselves.  Keep in mind that personal transformation must precede corporate transformation.  How can we ensure internal change happens within our organizations?

A quote for you -- “The art of Progress is to Preserve Order amid Change…and Preserve Change amid Order”
This quote by Alfred North Whitehead encapsulates the leadership challenge faced by businesses of all sizes and in all industries in today's competitive economic landscape.   The balance required between maintaining some measure of order in business organizations while at the same time identifying and executing change strategies in order to achieve real progress is an issue that we all grapple with daily.
What can be done to restore these bonds of trust?  How do we maintain the balances between group progress order and change?  Is it not the time to get back to basics – caring, communication, client education, relationship management and training?

Again, deep questions for us to consider.

Our panels will provide you with tremendous insight into these and other issues - as we navigate into the future.  The goal is for you to leave this conference with more insight, clarity and confidence on the business challenges you face.