Securities Lending Today

FinTuition Forums Boston: Westin Copley Place June 13th

Through FinTuition, I teach people around the world about securities lending.  In particular, a well-informed beneficial owner community benefits the securities lending business, yet traditional educational and training formats are not suited to reaching wide audiences in an interactive environment. 

While independent trainers such as myself must add value to keep our clients satisfied, it’s a challenge for conference speakers to balance the need to be interesting and informative without giving away any secrets or unashamedly promoting their firms.  So knowledge transfer at conferences is often the victim, with little sharing of views, negligible debate and lots of “agreeing” with the other panellists.  So attendees rely on networking with their service providers and peers to provide much of the event value.  Clearly, networking is a critical feature of conferences.  Yet, these days, time out of the office needs to show a demonstrable and clear benefit.  Further, budgets are tight and everyone has to prioritise their spending.

To address the challenges of getting real education, fitting into the economic environment and optimising time out of the office, we have launched FinTuition Forums with a limited offer of No Cost Registration.  FinTuition has teamed up with a number of leading market participants to launch the first FinTuition Forum, scheduled for June 13^th in Boston at the Westin Copley Hotel.

FinTuition Forums combine sponsored, but independent training with panel sessions and guest speakers that can uniquely benefit the community.  Drawing on FinTuition coursework and instructors, the attendees will get real value for time spent out of the office, while sponsors will be bringing valuable information to the marketplace and all will benefit from networking opportunities. 

• Executive training and education will be at the event’s core and make up the first 5 hours
• Panel sessions will complete the final working portion of the day for open debate and discussion with panellists drawn from a wide pool of industry experts
• Attendees will take away written material that is more than just an agenda and company ads
• A networking cocktail reception will close out the day
• The audience will be restricted to beneficial owners, fund managers, the sponsors and the day’s speakers and co-educators

Thanks to our sponsors there are a limited number of places available at no cost to qualifying attendees.  We have seen a mixture of delegates sign up – not everyone will need or want to attend the training sessions – they may only wish to attend the closing sessions.  Many others want to make the most of the full day of leading edge information and discussion.

The agenda is as follows:

Executive Training 9:00-2:00

Alpha Generation vs. Risk: Assessing the Revenues and reviewing the Risk mitigants

Collateral: History and Changing Spectrum of Collateral

Risk vs. Reward: Assessing the Revenues and reviewing the Risk mitigants

Short Selling: Analysis and evidence surrounding this controversial issue

Roundtable Discussions & Presentations 2:00-5:00

Demand Drivers:  Review of trends, opportunities and impact of regulations

Managing for Success: Changes driven by Market Participants

Shaping the Future: External factors impacting the Industry

Networking Reception 5:00 – 6:30

Click on the following link: http://fintuitionforumboston2012.eventbrite.com/ or contact one of our partners for more information.  After these spots are filled, additional places are available for $599.00

FinTuition Forums:  Real Education; Real Discussion and Debate; Real Interaction

Securities Lending Conference, ETF Conference and ETF Study

I am due to appear at a couple of conferences in the next couple of weeks.

First, I am moderating a panel session at the Canadian Securities Lending Association Second Annual Conference on Wednesday.  There is still time to register for this fantastic event.  The Canadian market is big, sophisticated and professional, so it's always an enjoyable experience engaging with this community.  My panel session is "The Future of Securities Lending".  Great panel (Brian Lamb from EquiLend, James Malgieri from BNY Mellon, Tony Venditti from BMO Capital Markets and my Trading Apps colleague Jean-Paul Musicco) and lots to discuss.  What do you think the future holds for securities lending?  If you were moderating the panel, what questions would you be asking?  Let me know, and if I get a chance to ask the question on your behalf I will post the reply here.  Send your emails to roy@stocklendingtoday.com

Second, I will be at the IndexUniverse Inside ETFs Europe conference in Amsterdam next week.  This is an amazing event with huge attendance and a wide range of interesting topics for panels.  I am speaking on "Going Short with ETFs" panel alongside David Murtagh - Susquehanna, Althea Trevor - Astor Asset Management, Ivo Jenniskens - Providence Capital and moderated by Matt Hougan, President of ETF Analytics, IndexUniverse.  So again, interested in your views - issues, challenges and opportunities in going short with European ETFs. 

Some of you may know that my CCP white paper co-author Andrew Howieson and I are in the midst of working on an ETF study and a central part of the subject is related to European ETF lending, borrowing and financing.  Want to know more?  Drop me a line and I'll fill you in.

Regulatory Changes in Securities Finance

Question: What is the only certain “bull market” this year? Answer: Regulations

We can be certain that at the end of 2012 there will be more regulations than there are now. Financial News ran an article today entitled “Stock on loan: At the crossroads” that looked at some of the regulatory changes that may impact the securities lending business. They touched on Basel II, the dreaded Financial Transaction Tax and ESMA’s short selling rules. [note:  I think you need a subscription to access the Financial News Article]

These are amongst the most directly influential regulations that will impact securities finance, but they are not the only ones. To these three, we can add Dodd-Frank, the Volcker Rule, Solvency II, Liquidity Swaps, the Financial Stability Board and the pending IOSCO report on Exchange Traded Funds.

The securities lending market infrastructure has stood up well given the unprecedented shock of the liquidity crisis and the Lehman default. Nevertheless, we need to accept that there is a political thrust for greater regulations across the entire financial marketplace. Several challenges face the business. First, many rules have yet to be written. How can we react to the rules if we don’t know what they are? Second, regulators themselves are under pressure. The very short three week response timeframe on the recent ESMA technical specifications for short selling is an example of compressed comment periods. As deadlines approach, there is a risk that regulatory/marketplace interaction will be compromised. Third, while most firms have invested significant time and effort in examining proposed and implemented regulations, there is a concern that the impact of the regulations doesn’t get translated for business units.

It’s this final point that led a bank to approach me at the end of last year. “Our Compliance people know what the rules say, but they don’t always understand the impact on our securities finance business”. Fair point – someone told me a couple of months ago that there are between 5,000 and 10,000 pages of new regulations being published every month.  How can any Compliance group really be expected to digest and pass on all of this?  So we were asked to put together a course that addresses the regulations noted above, but translate them into the actual and potential impact on the securities lending business. I was a little bit concerned about teaching a course about rules that didn’t yet exist, but on reflection, that turns out to be exactly the point.

I brought in a couple of co-trainers that have complementary experience and we have put together a course that looks at each of these areas and summarises each unit with Impacts, Opportunities and Challenges for the securities finance business.  We launched the course last month and are now making it available to others.  The course is customised to the specific regulatory interests of clients and adapted to the time and audience. The video below will give you some more details about the course.

Delegates will learn more about each of the relevant rules and regulations, and more importantly how their business might change as a result of any application of the regs.

As Bob Dylan might have written (had he been in securities lending):

Come gather ‘round people

Wherever you roam

And admit that the regs

Around you have grown

And accept it that soon

You’ll be drenched to the bone

As the tide of new rules

Keeps on risin

Then you better start swimmin’

Or you’ll sink like a stone

For the Regs they are a changin’

(Sorry Bob)

Securities lending's many functions - indeed

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.

 

"An old world for Securities Lending" - I beg to differ

I read a blog post tonight and was going to just comment on the blog, but instead I thought I would turn it into a post of my own.  The author of "An old world for Stock Borrowing and Lending", Gary Wright is a securities industry veteran and I usually find his views interesting and thoughtful.  This time however, I have to disagree with him.

In Gary's article he suggests that the ESMA regulations and short selling and securities lending "appear to me [Gary] to be an admission that the stock borrowing and lending structure in the UK circa 1985 actually worked extraordinarily well"

I draw a different conclusion from the ESMA short selling regulations.  They don’t harken back to the circa 1985 stock lending market, far from it.

I set up my first borrowing desk in London in 1987.  I think it is fair to describe the activity in the market at that time as a small but profitable hobby for some with the regulations driven by the Bank of England’s desire to be able to monitor activity in gilts.  The fact that equities were equally restricted was a by-product, which if not accidental, certainly wasn’t a priority and while they could have chosen to view which companies had the largest short positions as Gary suggests, typically they were more concerned with gilts and the money markets. 

I also have to adamantly challenge the assertion that stock borrowing has “opened the floodgates for market abuse”.  Market abuse regulations have been in existence for many years and are continually tightened by regulators.  Market abuse can be perpetrated in many forms, but other than the Maxwell fraud – and I do say fraud rather than securities lending - I am unaware that the ability to freely borrow securities as having been the cause of any market abuse.   I should also mention that today's day-traders that flatten positions by the end of the day would have loved the market environment Gary refers to - fortnightly settlement gave rise to all kinds of interesting intra-settlement-period trading Gary doesn't discuss.

As Gary correctly points out, the ability to borrow securities was restricted to jobbers and was gifted in order to support the liquidity of markets.  This remains a key driver of borrowing demand today.   Numerous academic studies point to the negative impact on liquidity that short selling restrictions imposed by regulators in 2008/2009 and again by a tiny handful of regulators last year caused in the marketplace. 

Unfortunately what Gary doesn’t point out is that beyond market making activity, investors and traders require the ability to short sell to hedge, take advantage of arbitrage opportunities and yes, even take negative directional views on securities.  Restrictions from the mid-80's would reduce the ability to manage risk for some (which probably isn’t Gary's intention) as well as reducing the ability for others to increase risk positions (which appears to be his preference).  A market with the borrowing controls of the pre-Big Bang era would mean smaller markets for equities and fixed income as well as derivatives.  Securities borrowing is never done for it's own sake, it is virtually always the result of another transaction in cash or derivative instrument.

ESMA recognises the valuable contribution that short selling makes to the marketplace.  Their work questions how to ensure that short selling does not disrupt the market process.  By enhancing the certainty with which short sellers can obtain and deliver securities – without the draconian controls of the 1985 era Gary refers to – ESMA rightly concentrates on the issues that could otherwise increase systemic risk.

Unfortunately I won’t be able to attend the short selling debate on 22 February as I will be teaching a securities lending course.  Will Gary (or whomever) challenge Frank Field on his unsubstantiated comments from a few years ago regarding unauthorised securities lending allegedly being conducted by a custodian in the UK.   I was editor at Global Securities Lending Magazine at the time and despite pestering from our end, Mr Field failed to add any more detail and the allegations withered in the wind.

"An old world for Stock Borrowing and Lending" - most certainly not.