Securities Lending Today

Securities Lending Training

Many of you will have seen that my training company, FinTuition was recently appointed to create and teach an introductory securities lending course for the Canadian Securities Lending Association ("CASLA").  We are quite proud to have been chosen to work with CASLA to develop this course and I am looking forward to conducting the first event in the coming months.

The CASLA appointment followed on from last year's selection of FinTuition by the International Securities Lending Association to launch the "Introduction to Securities Lending" course.  We have now run this course six times over the past year with sessions held in London, Amsterdam and Zurich.  We have had tremendously positive feedback on this course, and the number of people attending the course reflects this popularity.  The next course in London is being held in seven weeks and more than half the seats are already gone!  We will be running four more sessions this calendar year: two in London, and also in Stockholm and Frankfurt.  You can get an idea of the course objectives and content by clicking on the video below. 

 

The good people at JP Morgan Collateral Management are hosting the 20 September course, with previous hosts including Zurcher Kantonalbank, Brown Brothers Harriman, Citibank (three times!) and ISLA itself.

I've just finished putting the final touches to a brand new course:  Global Securities Lending.  This is an overhauled version of the International Securities Lending course and is targeted at those who have a solid understanding of securities lending fundamentals, and are looking to obtain a more complete view of the complexities of the business, where it is today and where it may be headed in the coming years.  We will take delegates through the current state of the business and also address and debate the challenges, issues and opportunities that lay ahead.  I'm really looking forward to teaching this course and there isn't another securities lending course  that will be able to match this one for timeliness and relevance and I am expecting it to be a thought-provoking couple of days.

Training seems to be squarely back on the agenda for leading firms.  In addition to the open calendar of courses that we run throughout the year, the demand for in-house training has been increasing dramatically.  Over the past few months, we have done in-house sessions on securities lending, Exchange Traded Funds ("ETF"), prime brokerage, collateral management and short selling.  In the coming months we have other sessions aleady scheduled on bond financing & repo in addition to more sessions on the topics mentioned earlier.

 

 

Guest Author - Weekly Commentary on Financial Markets 13-17 June

For those of you who don't already know him, I'm very pleased to introduce Jacob Schmidt, founder and CEO of Schmidt Research Partners as a Guest Author.  Jacob is an international financial markets expert and hedge fund consultant.  He is also a trainer for FinTuition where delegates consistently rank him as an excellent trainer in his series of hedge fund and prime brokerage related courses.  Jacob's next FinTuition course is "Performance Analysis of Hedge Funds" on 6 & 7 September.

Weekly Commentary on Financial Markets: 13-17 June 2011

This week was dominated by global events again:

The downgrade of Greece by S&P to the LOWEST rating of any country drove financial markets further down, to be reversed somewhat at the end of the week. The peripherals Portugal and Ireland continue to be under stress and the risk of contagion to Spain and Italy is on the cards. Due to the inaction on the national level of EU member states as well as the European level, markets feel further pressure from the uncertainty around the outlook for Greece, a potential restructuring and the fate of the EURO itself. Too many dissenting views from German and other European politicians and aggressive forecasts of the EURO’s future (see Nouriel Roubini in this week’s FT) are very damaging. Lack of certainty – risk of a repeat of the 2008 Lehman mistake.

In the US the July deadline for debt ceiling on US government debt is approaching fast. China appears to take on a bigger role in the bail out of Greece. After 150 years of the UK as a world power, 50+ years of the USA, China is now emerging not only as a richer, but also more influential player, perhaps taking over America’s role. I believe that the Greece problem will continue to drag on with bridge loans and short term fixes rather than strategic decisions. Further EU expansion becomes very unlikely.

Outlook:

Markets are concerned about a “messy” Greek default and resulting casualties in the banking sector as well as contagion. Any indication of a fix (short term or – less likely long term, strategic) will lift equity markets. Investors find a lot of good companies, but should avoid any of the recent social media IPOs and the potential Facebook IPO rumoured to be valued at around USD 100 b!

A summer rally in US and European equities are very likely.

Bond Markets continue to be dislocated. What is worse: Greece trading at 30% (2years), 20% (5 Y CDS) and 18% (10 year)) or US Treasuries at artificially low yields (0.37% for 2 years,  1.52% for 5 years or 2.94% for 10 years? 

The Greek tragedy reminds me of the messy 1980s LATAM and 1990s CEE defaults, the prolonged restructuring talks and finally, after a long search for a solution, the Brady plan. Politicians seem to underestimate the severity and the duration of such a scenario.

Commodities – precious metals – could again become safety assets for many investors.

Conclusion: European leaders need to act now to avert a repeat of Lehman 2008. The USA’s brinkmanship will be the next big issue, during the summer.  Investors should expect more volatility.

Hedge Fund Radio

Every Monday night at 9 pm, Resonance FM 104.4FM in London area or online worldwide at ResonanceFM.com; you are invited to listen to one of its five Sony Award nominated programmes – The N@ked Shorts club.

It can best be described in the following way: “1 hour of loose talk about hedge funds and the state of the world, plus sweet poetry and heady music...No promotional agenda, no commercial intent...just Ponzi Bier and light relief in these interesting times.”

But don’t kid yourselves, while the guests have a lot of fun, there is some serious chat about the business, and nobody sells their company’s products! Hedge funds, prime borkerage, short selling, securities lending and similar topics are likely to come up during the course of this show.

The guests reflect the pulling power of the concept and the inimitable charm and wit of Dr Stu, the host and chief Hedge Fund Therapist.  Dr. Stu will help callers to the Emergency Hedge Fund Helpline to reconnect with their Inner Trading Signals.

Check out the list of distinguished guests for Monday night’s show:
David Aldrich, Managing Director at BNY Mellon; James Clunie, Investment Director of SWIP; Thomas Deinet, Executive Director, Hedge Funds Standards Board; Bill McIntosh, Editor, Hedge Fund Journal; and via Tantric video-link from the US, Bob Sloan, Managing Partner of S3 Partners.  Rounding out the cast is City headhuntress/Writer Sarah Dudney and the transcendental Leanne Bower.   And myself of course …

Some familiar names on this list:
James Clunie as the lecturer for the FinTuition Short Selling course and author of Predatory Trading and Crowded Exits;
Bob Sloan is also the author of “Don’t Blame the Shorts” one of our favourite books;
David Aldrich, a long-time contact focused on the Alternatives space for BNY Mellon;
Bill McIntosh and Sarah both of whom I have had the pleasure of appearing alongside with on the show in the past.

Should be a great show.  If you can’t listen live on the radio or on the web outside London, and are interested in getting a link later in the week, let me know at roy@stocklendingtoday.com  

Securities Lending - No longer under Siege!

When I started this blog, it was just before the short selling bans were implemented in the summer of 2008.  Short selling and securities lending were being demonised as the cause of crashing markets.  An air of hypocrisy hung over the industry as a few investment banks with huge prime brokerage revenue streams jumped on the "blame the shorts" bandwagon.  So I thought my small contribution could bring more education and understanding to the business and fight against this lack of information.  Hence, I felt it appropriate to subtitle the blog "An Industry Under Siege". 

On a couple of occasions I have felt that maybe the siege was being lifted.  We have had regulators around the world acknowledge the valuable role that securities lending plays in the capital markets.  The IOSCO report in June 2009 highlighted this contribution.  We now regularly see markets where securities lending has been prohibited, or at best not explicitly authorised, launching the activity as part of their efforts to move their markets forward.  Pakistan is the latest example with securities lending being approved from the start of this week.  Today there is an overwhelming body of academic research showing the value of short selling.  By extension, if short selling is good for markets, the fact that investors generate incremental fees in supporting the liquidity and pricing of the assets they buys and sell, well surely that is the definition of "Win- Win".

I have had to come to grips with the fact that universal acceptance of short selling and securities lending will never happen.  The first complaints about speculative short selling happened in the early 1600's and many of the arguments remain the same today.  Short selling can be part of abusive trading practices that drive down share prices.  But there is an equal risk for manipulation on rising share prices.   That's why we have rules and regulations that the authorities are charged with implementing and applying.

There are definitely challenges ahead for securities lending.  Lawsuits linger from the height of the turmoil in 2008.  The desire for politicians to "do something" or at least to be seen to be doing something is always a concern.  The impact of regulations, both direct and indirect, are unknown and loom on the horizon.  The biggest and most immediate issue remains a dearth of borrowing demand, and if anything will get the attention of market participants, it is the profitability of the business.  After all, this is a business, and I think the billions in revenues that are generated for institutional investors each year are the best evidence of this.  It is not the back office function where its roots lay.

So, no longer in the Dark Ages, no longer "under siege", no longer just "stock lending", I give you "Securities Lending Today".

PS - Thanks to those readers that continuously give me feedback and have recently suggested I reconsider the "Siege".  The feeling is that by maintaining "Siege", it undermines the stellar work done by many across the world to improve understanding.  You are right, and I have made the change.  Thanks!

IMN Securities Lending Conference: Central Counterparty Panel

It looks like this year's event is throwing up a lot of interesting discussions.  Either that, or the coverage this year is better and more timely.  I am going to use the reporting as the springboard to make my own comments as I wasn't able to be at the event this year.

I suggest you start by reading the story in Fundamentals, which you can read here.  As many of my readers will know, Central Counterparty is a bit of a specialist subject for me and I have often moderated or participated on panel sessions on the subject at conferences around the world.  Additionally, last September, I co-authored a white paper alongside Andrew Howieson which you can access for free by signing up here.

So what do I think about the views and opinions expressed by the panellists?

Let me start by saying that Ed Blount has it on the money when he says the regulators like CCPs and wherever possible are trying to encourage their use in clearing financial instruments.  I would also agree with Ed that securities lending is on their radar screen, but I don't think it's at the top of their list. YET.  The great description given by Ed as to the layers of protection offered by CCPs and considered by regulators is a very useful synopsis of why the right CCPs give the business as a whole better security than a series of bilateral trading relationships.

Greg DePetris is right that an imposition of CCP on the securities lending market would be the wrong way for it to happen, but that might yet be the outcome - time will tell.  It is probably more likely that a portion of the business will migrate to CCPs as the cost of new regulations makes CCPs a cost-effective route for dealers to increase the business amongst themselves (as it is in repo) and with the few leading-edge agent lenders that I believe will have solutions.  (And before anyone else says it - will they be "leading edge" when they implement or "bleeding edge"?) Some agents are indeed focusing significant time and effort to the subject. 

My view is the reduction in leverage and proprietary trading of the banks has reduced the internal pressure at leading dealers to move to CCP for part of their business.  If volumes increase, and I for one hope they do, I think the pressure will rise and drive some to use CCPs more than they currently believe they will.

I have recently written an article where I point out several of the product gaps with the existing CCP offerings and suggest some solutions.  David Downey points out that there are alternatives to some of the problems that beneficial owners and others have cited.  Some of those alternatives exist today, I expect better, more appealing products in future.

Mick Chadwick, who could be from Missouri if it wasn't for his accent, remains to be convinced on the agency lending side of the business.  (For those of you who don't understand the Missouri reference, its nickname is the "Show-Me State")  Mick is waiting to be convinced of the value.   As Greg suggests, Ben Owners would benefit from wider distribution through CCP usage, a view apparently not met with joy by Mick.  I wasn't there, so I don't know Mick's thinking, but I have often heard lenders say that they don't want to have exposure to entities that they aren't directly connected to already.  

While I have some sympathy for that argument, the reality is that lenders have exactly the same kind of indirect exposure to hedge funds through the prime brokers.  They would never lend directly to the hedge funds, but if the PB wants to take the risk, so be it.  In the same way, those borrowers that Mick and other beneficial owners don't deal with directly get the stock from somewhere.  If an intermediary wants to take the risk, so be it.  The only difference with the CCP model is the beneficial owner benefits from more layers of protection and an intermediary spread in the middle is replaced by the cost of the CCP (and probably at a lower cost).

I also think it's a bit strange to suggest that because some beneficial owners were considering whether to continue lending under the existing model is necessarily a reason to exclude discussion of a new model.  Surely if investors have an issue with the current set-up, then looking into alternative ways of doing things is EXACTLY what they should be considering.

The debate continues and as Craig points out in his article. few topics generate this much argument.

P.S.  It will be interesting to see if the NYSE/Deutsche Boerse merger goes through.  SecFinex, the European trading platform that links to a couple of CCPs currently is a subsidiary of NYSE and Eurex, which is working towards a securities lending CCP solution, is jointly operated by Deutsche Boerse and SIX Swiss Exchange.  It would make an interesting partnership.