Securities Lending Today

Securities Lending, ETFs and Training Roundup

I have been very busy over the past few weeks and a lot of things have been happening.  I will do a quick update for you here - but just at the headline level - no time to get in depth, but at least you can make certain you are on top of the latest news.

Australian Securities Lending

Are our colleagues in Australia getting some relief from the regulator or just a different set of requirements? The Australian Securities and Investments Commission (ASIC) has announced some changes to the regulations related to securities lending.  Included is a new set of requirements for disclosure of positions above 5 percent of a company's issued share capital.  You can read the story in The Australian here, and the ASIC press release here.  Not quite certain what to make of these changes ... what's your view?

Exchange Traded Funds

A gang of three global regulators jumped on ETFs this week and securities lending was right at the forefront of discussion points.  Read Paul Amery's blog post on the issues here.  I am speaking at the IndexUniverse Inside ETFs conference in Amsterdam on 5 May and this week's announcements will give us plenty to discuss.  Paul is the European editor for IndexUniverse and is also the moderator of our panel.

SEC Confirms Capital Benefits for Cental Counterparty Use

Not a shock that the SEC has confirmed favourable capital treatment for securities lending trades cleared through the Options Clearing Corp (the CCP in the US). but always a relief to see it confirmed.  Use this CCP and save! (If it applies to you that is ... )

Securities Lending Award Winners

The latest Global Custodian securities lending survey results were released.  Many congratulations to Brown Brother Harriman (tops for third year in a row!) and JP Morgan, rated as the two top firms.

Global Pensions Magazine announced the winners of their annual awards earlier in March. eSecLending took top honours as Securities Lending Provider of the Year.

Training

It has been a busy month for my training company with both in-house and open-enrollment courses being quite busy.  I am teaching securities lending every week this month (in-house and public) and we have also had hedge fund training, repo courses, introduction to global financial markets and have another in-house collateral management course coming up.  Remember, if you want to make great savings for your company on training, join the FinTuition LinkedIn group to claim your discounts.

Securities Lending Traders Network

Speaking of LinkedIn, I am pleased to advise that the membership of the Securities Lending Traders Network group on LinkedIn has just passed 1,900 people from more than 30 countries. Members need to be market participants or clients of those firms, vendors to the industry or service providers such as recruitment firms.  I deny applicants that can't convince me they are tied to the industry and journalists and members of the media.  Less than half the people that apply are accepted.  I hope that members find the group a useful forum for industry issues.  I know it's a benefit to my business.

New Member of the Team

I am please to announce that Ted Hall  has joined FinTuition and Zimmerhansl Consulting.  Ted will be responsible for European Sales and Marketing for FinTuition and contributing to the expansion of my consulting practice.

 

Guest Blog: Securities Lending in Australia

I am fortunate in having interesting readers of my blog, many of whom share their personal perspective with me. After my "No longer under Siege" post, I received this from Australia.  The contributor has allowed me to post this item, under protection of anonymity.  Let me make it clear that this person is NOT part of the borrowing/lending community, rather can best be described as an "informed observer" whose opinion I value across a number of matters.   (If you are interested in doing a guest blog or having your comments shared in a future post, please contact me at roy@stocklendigntoday.com)

Enjoy the comments (and please read them with an appropriate attitude of sarcasm is some spots)

"Roy,

For Australia, short selling remains a confirmed curse.

Certainly the argument has not been won in the media; and that includes the financial media, not just the populist press. Short selling remains purely a method by which hedge funds and investment banks drive down and destroy companies for their own short term gain. Nothing more.

For ASIC, whose primary response impulse is the media – not academic research, and certainly not industry opinion -  the best that could be said is that short selling is tolerated, but frankly only because ASIC won’t win the argument with their counterparts elsewhere in the world, and short selling will continue.

As for securities lending; it is even worse. It is purely a method for fund managers to make a tiny bit of extra money for themselves, lending out fund members assets without their knowledge or permission, to speculators who then use those borrowed securities to destroy the very companies the funds own in the first place! It is a practice of supreme stupidity and short sightedness. All recent commentary I have seen about securities lending has been along the lines of "When is the Regulator going to wake up to this practice and have it banned?" 

As for equity financing, that is simply a way to deceive owners of securities to unwittingly give up ownership of their stock at absurdly low loan value ratios, so that – at the very least – the securities can be lent out to the speculators, or worse, so that the financier can leverage himself on the back of other peoples' stocks. It is positively criminal.

So, has the siege been lifted? Most certainly. Because the barbarians broke through the ramparts long ago, and are now firmly in control. Little now remains of what was once an active on-shore industry, and that is the way it will remain.

Does any of this matter on a global scale? Does it matter if the industry is going backwards in a supposedly developed market; surely the future belongs to countries like China and India anyway?   No, it doesn’t matter, and I know you’re not kidding yourself that the industry has somehow ‘won’. But remember – and to horribly misquote – the “price of continued existence is continued vigilance”.

If you start to believe for one instant that your industry is ‘safe’, that everything will be ‘alright’, remember what has happened here. Maybe it would be better to keep the mindset that you are constantly under siege?"

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. 

International Securities Exchange Leads Investment Round in Quadriserv

Things continue to "hot up" in the electronic securities lending space as evidenced by this latest round of fund raising in Quadriserv.  You can read the story here. 

No time for analysis this morning as I am heading out to conduct another securities lending workshop session.  Two other bits of other news for you:

FT.com:  HSBC shares plunge to 13 year low amid short selling

Reuters:  SEC looks at short selling measures

Oh yeah, I almost forgot ... Alan Kohler slammed securities lending in yesterday's Business Spectator in Australia.  As I mentioned yesterday, I added a comment because the last line of his article was: 

"Let's have that debate"

They still haven't printed my comment.  Debate, what debate?

Short selling from Australia to America

Image via Wikipedia

The short interest data for the NYSE and NASDAQ was published last night for short positions as at the end of February.  Overall short interest was up by 3.1% on the NYSE, showing a short interest of 3.83% as compared to 3.61% at mid-February.  NASDAQ numbers showed a 2.1% increase in the two week period.

This tied in neatly with comments from Barney Frank who told reporters that the SEC was planning on reimposing the "uptick" rule in the US.  The uptick rule requires that a stock cannot be sold short unless the most recent trade was higher than the preceding one.  The idea is that the uptick stops a wave of continuously negative trades being executed, acting to slow down short sales being executed.  The fact that it is being looked at should hardly surprise investors or trades as Mary Schapiro, SEC Chairman made a commitment to re-examine the uptick at her confirmation hearings. 

Two things I don't understand follow.  I know, any of you will say there are a lot of things I don't understand, but stay focused please.  If the removal of the uptick has allowed shorts to trade unfettered and as a result exposed us to the turmoil we are in , then why aren't the short interest figures higher?  The entire US (and world) markets are down, so how can such a small percentage of shorts be the driver.  And if the uptick rule stopped half of all the shorts, would we have avoided the horrific markets we've seen?  The second item is that I don't recall Tech stocks being saved when that bubble burst even though the uptick rule was in place.  I obviously don't get it, so please explain.

Normally it's the short sellers that get the grief, but the latest comments from Australia questions the value of securities lending itself.  Alan Kohler, commenting in the Business Spectator raised the following:

"The question is whether artificially increasing the supply of listed securities through stock lending is necessary for the better functioning of the securities market and the economy.

Let’s have that debate."

I can never resist these things, so I added a comment.  Let's see if he really is interested in a debate.  As of writing this post, they still haven't published my words.  I will however, give them the benefit of the doubt due to the time difference.  I'll keep you posted. 

No posts for a couple of days as I am off to Paris, spreading the Stock Loan Love!