Stock Lending Today - An Industry Under Siege!

Central Counterparty White Paper

Central Counterparty (CCP) facilities for securities lending transactions have been under discussion for many years. During 2009 those discussions became a reality and today CCPs in Europe and the United States operate securities lending initiatives in collaboration with electronic trading platform providers.

To date, the arguments both for and against CCP have resembled ships passing in the night, with a lack of independent analysis and little resolution.  Andrew Howieson (of Howieson Consulting Ltd) and I are nearing completion of a white paper that will seek to bring the discussion to a practical level.

The white paper will seek to achieve the following goals:

• Provide a practical explanation of the purpose and objectives of CCPs;
• Identify the unique requirements of securities lending for CCPs;
• Give an analysis of the securities lending CCP implementations;
• Generate market perspectives for Beneficial Owners, Agent Lenders, Principal Borrowers and Hedge Funds

We have conducted interviews with a number of different firms, and we are still interested in speaking with more.  If you would like to share your views with us, please contact us at ccp@stocklendingtoday.com - we will close the project for comments on 2 July. 

Don't miss the following events that feature securities lending CCPs as part of the agenda:

ISLA conference 22 - 24 June in Berlin - Panel session:  "Central Counterparties for financing products in the real world" AND the "Roundtable Discussion on Central Counterparties for Securities Lending" which I am moderating.  Andrew will also be in Berlin if you would like to meet us in person.

IMN Beneficial Owners conference June 28 & 29 in Boston - I am moderating the "Central Counterparties: Everything A Beneficial Owner Needs To Know" panel session.

ISLA partners with FinTuition on "Introduction to Securities Lending" Course

The International Securities Lending Association (ISLA) is to partner with FinTuition  on the training group’s Introduction to Securities Lending course as part of its new education initiative. The course is a one-day module designed to give attendees a broad overview of what securities lending is and how it works.

Having considered a number of potential partners, ISLA chose to work with FinTuition on the introductory course and expects to make further announcements about other training modules shortly.

ISLA Chief Executive Kevin McNulty said: “We are very excited to announce the first element of ISLA’s education programme. FinTuition’s experience of providing training courses for securities lending and their in-depth product knowledge make them an ideal partner for us.”

ISLA decided to develop a formal education framework in 2009, to help support the training and competence requirements of its members and other market participants. Rather than develop training modules in-house, the ISLA board decided to partner with a firm that has a proven track record in delivering quality training programmes.

The first phase of this strategy will encompass three training modules: an introductory course, a course that provides in-depth coverage of the Global Master Securities Lending Agreement, and a computer based module on the SLRC Code of Guidance (an industry best practice code).

Roy Zimmerhansl, owner and principal of FinTuition said: “ISLA has taken a leading role in promoting a better understanding of securities lending during a particularly challenging period for the industry. We are very pleased that ISLA has selected FinTuition to help inform and educate the markets, media and regulators.”

You can read the press release  here..

Caught N@ked again!

You are cordially invited to listen to the Monday, May 24 edition of theN@ked Short Club 9-10pm/ 21.00-22.00 hrs., London time, on Resonance FM [104.4FM within London / online worldwide via ResonanceFM - 1 hour of loose talk about the poetry of hedge funds and the state of the world, plus sublime prose and heady music...No promotional agenda, no commercial intent...just light relief in these interesting times.

Host, Dr. Stu will put callers to the Emergency Hedge Fund Helpline (1-800-DISTRESSED) back in touch with their Inner Arbitrageur, with expert guests (Simon Kerr- Oriel Securities/ Hedge Funds Journal; Tim Price- PFP; Thomas Raber- Alvine Capital; Marilyn Ramplin- Ramplin Capital/ UCITS For Hedge Funds; Roy Zimmerhansl- Fintuition/ Zimmerhansl Consulting; the mysterious Dr. Ilya Kuryakin; plus, the extraordinary Anne Pigalle). Feedback to doctorstu@esonancefm.com

Resonance FM is not-for-profit (UK registered charity no. 290236): supported entirely by grants and donations [the Guardian calls it “the best radio station in London”; the Village Voice, “the best radio station in the world”] If you enjoy the N@ked Short Club, you can support the station’s continued growth with a secure donation via ResonanceFM.

 

SecFinex Departures Raise Questions

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.

Too Many Conferences?

I am busy preparing for quite a large number of conferences.  Next week we bring the GSL Summits to New York for the first time.  On June 3rd we go to Tokyo and the next week we are in Toronto.  I am also moderating a panel at the ISLA conference in Berlin and then the following week I'm moderating another panel in Boston for IMN.

I regularly am told by people that there are just too many conferences, and I understand why people say that.  Yet, I take a different view.  Well I would, wouldn't I?

So how can I argue that these conferences add value and that there aren't too many.  First of all, we need to exempt the ISLA, RMA and PASLA events from the discussion.  These are events for the industry, and led by the regional trade associations.  In addition to the content which get better year after year, these are also efficient gathering points for the business.  These conferences focus on the issues that can be considered as part of the "inter-professional" marketplace.

Now let's turn to the conference organiser events.  Why is GSL doing a dozen events around the world this year?  We started in January in Stockholm and heard positive comments from a number of beneficial owners.  "We don't go to securities lending conferences and are only here because the event was brought to Sweden"  was a common comment.   We then moved to London which included an address from Kevin McNulty, the CEO of ISLA.  The audience included a number of beneficial owners as well as representatives from pension associations.

Frankfurt was next on the schedule and we saw an excellent presentation from Deutsche Bank on the global regulatory outlook.  It also marked the first time that we had a panel focused on repo and liquidity management led by the Godfried de Vidts head of the European Repo Council.  My gut feeling is that liquidity and collateral will become ever more important over the next couple of years.

Paris included a panel with LCH.Clearnet and Fortis - the provider and one user of the first European Central Counterparty.  We discussed what was really happening in CCPs in Europe, rather than the theoretical chats that usually turn up at conferences.

The point is that we try to bring new ideas, different speakers and issues relevant to the local markets.  Our model is designed to be accessible - we bring them to people around the world who wouldn't necessarily travel to conferences, they are free to beneficial owners, fund managers (including hedge fund managers), GSL subscribers, regulators and statutory bodies.  They are only half day events, so no one has to commit to too much time out of the office.  But enough of the sales pitch - that isn't the objective of this post.  Competing conference organisers also will make the case that they add value by taking a different angle. 

These events are about increasing communication and discussion and promoting openness.  After years of concentrating on only the biggest markets, it is time to get the wider community of stakeholders involved.  Bringing more people into these events around the world can surely only make the business stronger and better understood.  Yes, some may already have conference fatigue.  I look at it and say that anything we can do to widen the scope of understanding will have a positive impact the next time there is an attempt to whip up hysteria by the mainstream media or political figures.  More informed interested parties make for better decisions and lessen the likelihood of ill-considered knee-jerk reactions.

We look forward to seeing you in Hong Kong, Amsterdam, London, Zurich, Boston and Luxembourg in the second half of the year.