The title of the recent FT article "Securities lending and its many functions" nicely captures the essence of modern securities lending. The article focuses on the on-going debate between physical and synthetic ETFs (hilariously and accurately described as a "playground squabble"), but also mentions short selling, fee spits, collateral and regulations. All in less than 1,000 words. Impressive and very well done. The FT isn't always so well balanced in its coverage of securities lending issues.
I have written before that insofar as counterparty risk and collateral market risk, both synthetic and physical ETFs carry similar risk, although they are not exactly the same and at the moment synthetics as a group are setting the pace for disclosure standards.
Short selling is currently in the midst of regulatory rule-making discussions in the EU. The ESMA regulation on short selling is due to enter into force on 1 November 2012, and this has hastened the pace for development of the operational infrastructure required to support the regulation. Next week sees the deadline for comments on the consultation process for the production of technical standards and advice. That consultation period will have been only three weeks which is unbelievably short considering that this is to set the day to day operating standards under which the regulation will be operated. There is far from a consistent set of views across market participants and interested parties, so it will be a challenge for ESMA to sift the commentary.
The article also looks at fee splits, and the variety of arrangements in place. To my mind, moving directly to the question of "What is the fee split?" skips the most crucial question - "How is the program operated?" Kevin McNulty, CEO of ISLA sums up the issue well with his comment "Securities lending is an expensive business to run." and his subsequent explanation. The first and most important issue is the investment that the provider has made in building and operating the business, with the fee split a follow-on. A fund that receives 100% of the fees from a provider that underinvests in the business will inevitably discover it is a false economy. By all means negotiate hard for a reasonable fee split, but don't start there.
I first used the descrption the "Decade of Collateral" just over three years ago and the article closes on the topic. Despite only a brief mention, this is possibly the largest issue we have at the moment and the increasing range of business drivers impacting the need to obtain or transform collateral is exactly the essence of the title of the article - "Securities lending and its many functions". All types of trading products require increasing amounts of collateral. Securities lending is at the centre of this collateral evolution/revolution.
At the end of November 2011, I launched a new course to cover these and other major current issues in more depth. The feedback from the course was excellent with comments from attendees saying:
- "Excellent course content and teaching, insightful debate about industry issues and direction"
- "Excellent course with structure conducive to open discussion"
- "Guest speakers was a very good ideas. Discussion and format of the course was perfect"
- "Rather than just a theoretical approach, the course uses real case studies and examples which are very useful"
I am teaching this course again on 28 & 29 February. I hope you can join me and my guest speakers for discussion and debate on these and other issues that shape the future of our industry. The video below will give you some more information on the course. You can register for the course by clicking here.