Earlier today we reported on the departures of Peter Fenichel and Bob Reynolds of SecFinex. Both men joined the company in 2007 while I was launching the i-Sec – a direct competitor. As much as we were nominally combatants, it seemed that we were actually more like colleagues with a common objective. The goal was to convince the community to embrace electronic trading.
Peter’s arrival heralded the first rumblings of central counterparty for securities lending in Europe. I was happy for SecFinex as the mature product to take the lead and do the heavy lifting while I was still trying to help my baby grow through its infancy. My thinking was that SecFinex could do the groundwork and I would piggyback on any success. After all, CCPs thrive on volume and I knew they wouldn’t turn down increased trade volumes from another platform. For that matter, SecFinex would also see the value in more trades flowing through the CCP, even if that was through a competitor.
Peter’s background in the fixed income markets provided a useful template for how securities lending might adapt and change. The promotion of central counterparty became a key part of the development of the company’s plans and just under a year ago LCH.Clearnet launched the first European CCP. We are still in the early days of CCP development with SIX-x Clear also launching a securities lending CCP last year and Quadriserv partnering with Options Clearing Corp. Compare securities lending CCP development with the first year of EquiLend development. Changes take time.
There are several questions that now come to mind as a result of the departures. Has SecFinex veered from the path that counts on CCP as a central plank in its future success? Is the case for a CCP lessened? How important are the individuals as opposed to the corporate strategy?
The SecFinex spokesman made it clear today that it was business as usual and that the company was carrying on with its plans. Of course that strategy was developed and was being implemented by a management team that is now missing two of its key members.
The challenges facing SecFinex remain the same. First, securities lending volumes are down dramatically from 2007 yet electronic trading platforms provide their greatest value in high volume markets. Second, securities lending market participants’ take-up of electronic trading remains underwhelming. Third, and of particular importance is the ownership structure of SecFinex. NYSE Euronext is the majority owner of SecFinex with Fortis and Societe Generale as minority shareholders. There is only one thing I would have changed about my ICAP experience. I would have found a way for participants and potential participants to have an ownership position or quasi-ownership stake in i-Sec. My advice is that SecFinex look closely at this issue – firms with an incentive are more likely make the platform a success. Quadriserv has done a better job in dealing with this issue.
The inherent benefits, challenges and opportunities that
apply to a CCP for securities lending are the same today as they were a week
ago. The future skies for CCP are neither more
clear nor cloudier because of SecFinex management changes. There are bigger issues afoot. NYSE announced last week that it would sever
its relationship with LCH.Clearnet in order to build its own clearing
capabilities in Europe. This has had
quite an impact. S&P in particular has been busy – it has
already downgraded NYSE and put LCH.Clearnet on creditwatch for possible downgrade. Remember, this is the same LCH.Cleanet that
was a strategic partner in the securities lending CCP development. It seems that NYSE’s requirements overrode
SecFinex’s, but that’s just my observation. [You can see my recent interview with LCH.Clearnet's Francois Cadario from just before the NYSE announcement here.]
Seemingly, the market remains to be convinced about the increased transparency trading platforms provide and the true risk/reward value of a CCP. However the struggle for understanding of these issues is much further ahead today than it was a year ago, and it is a long war rather than a single battle.
The players all appear to remain committed to driving change forward. One thing is for certain though; the debate is diminished by the departures.
