Securities Lending Today

Wrapping up the Securities Lending Week

Just a quick note to give you a few updates:

Consob, the Italian regulators have extended their short selling ban on banks and insurers until 24 February.  

I'm appearing on the N@ked Shorts Club (Resonance FM online and 014.4FM in London) on Monday 16th January.  Hosted by the good Dr Stu, his guests Monday include Dr Chris Jones - CIO, Key Asset Management; Daniel Page, MD, Cornerman; Matthew Robers, Towers Watson; Margie Lindsay, Editor, Hedge Funds Review; Joe Seet, Senior Partner Sigma; the highly technical Leroy Couverman and Poet in Residence, Royal Academy of Arts, Pele Cox.

IMN - Beneficial Owners Securities Lending conference 29 - 31 January in Phoenix.  Click here for more info.

PASLA/RMA 9th Annual conference 6 - 8 March in Taipei.  Click here for the brochure.

FinTuition courses: Introduction to Securities Lending in London (24 January) and Amsterdam (2 February) and Performance Analysis of Hedge Funds in London (6 & 7 February)

The latest version of our Trading Apps portfolio evaluation tool is now live.  I'm really excited by this and it is being launched at the right time of the year.  Let me know if you'd like to hear more about it.

The poll on regulations is closed now.  Next week I will write more about pending regulations and securities finance.

Have a groovy weekend.

P.S.  My birthday today - dominated by Krispy Kremes.   Gym tomorrow.

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.

Securities Lending Demand and Technology

The signs of recovering demand for securities borrowing are still shaky.  According to a Thomson Reuters story last week, "Cross-border merger activity rose to $96.6 billion for year-to-date 2011, up 59% from this time last year and the strongest start for cross-border M&A since 2008." 

But of course, when it comes to short selling the news isn't always good, or in fact even clear.  Craig McGlashan wrote a very good article in Fundamentals magazine pointing out the issues and confusion amongst the people proposing regulations

There have been a number of stories outlining closed or covered shorts recently, with stories getting more coverage than Netflix.  Two fund managers give their explanation for closing out their position on Netflix here in an article from SeekingAlpha.com and it highlights the challenges of sound research and analysis not always being enough to guarantee success.

Given this mixed view, it is interesting to see what is happening with investment into securities lending.  In my previous post I asked three questions about the technology spending outlook for 2011.

The good news is that despite a very difficult P&L environment in 2010, 55% of respondents have said their IT budgets have increased for this year.  Half the people that answered indicated that their primary development target is for major infrastructure initiatives.  My feeling here is that some things were delayed or pushed into this year from last.  Finally, 63% of respondents told us that their technology developments were targetted at keeping them in line with their competition.   You can click on the box below to expand the charts.

 

Securities Lending Technology Questions

I am taking a few days off at the moment and enjoying the scenery. As I was sitting in the hot tub at midnight, listening to the waves crashing on the rocks below, staring up at a black sky punctuated by a multitude of twinkling stars, my thoughts naturally  turned to securities finance technology budgets for 2011. Obviously.

We are already more than 1/12 through the year so I assume everyone's plans are being enacted. I am curious as to the priorities for your firm this year.

2010 was a challenging year for everyone in securities lending, so the questions below will ask you three things: first I want to know whether your IT budget has increased, stayed level or decreased compared to last year.

I am also curious, given the uncertainty of the revenue outlook for 2011, whether you are planning big infrastructure projects, tactical applications that show a more immediate payback, client focused reporting initiatives or other.

And finally, do you feel you are playing catch up to the competition, staying abreast of leading firms or moving ahead of the competition.

Your votes are needed, your thoughts are always welcome.

Stock Lending Today - Happy Anniversary!

Today marks the first anniversary of the launch of Stock Lending Today.  I started the blog last year in response to what I viewed as ill-informed coverage of short selling and securities lending.  If you think back to last summer, the SEC in the US had implemented a short-selling ban on financial stocks, but at the time, it was the only country to do so.  The second reason I launched the blog was my feeling that the industry was at a critical point in the maturation process and there didn't seem to be an independent outlet for views to be expressed and challenged.

Within a month of launching SLT, Lehman had defaulted, AIG needed rescuing and there were major concerns raised about a number of other leading securities lending market participants.  There was a veritable media frenzy and I think the subtitle of the blog - "An Industry Under Siege" was well-earned.  Subsequently over 30 other markets implemented short selling bans or restrictions.  A number of high profile lenders withdrew from the market either in whole or in part. 

Politicians and regulators around the world struggled with the often conflicting challenges of protecting the integrity of the markets while striving to ensure that that companies and economies weren't unfairly targeted and attacked.  Often, the need to be seen to be taking action was as important as the actions themselves.  The confluence of events and circumstances in 2008 were unprecedented and as a result, no blueprint was available for reference.  The former SEC chair, Christopher Cox would subsequently reflect that the imposition of the short selling bans was the biggest mistake of his career.  Indeed, all the academic evidence suggests that investors were disadvantaged by the actions of regulators hoping to stabilise markets through restricted short selling rules.

The silver lining from those dark days is that the subjects of short selling and securities lending (now forever linked in the popular imagination) has survived the world's scrutiny and emerged with the recognition of the vital roles they play in the capital markets.  While there are still outstanding issues, inquiries and discussions going on in many markets, they are with the clear objective of restricting inappropriate activities and embracing legitimate short selling ans securities lending.

The competitive landscape amongst industry participants has changed more in the past 18 months than ever before.  The true winners and losers will not be known for perhaps another year at least, but there is undoubtedly more of a level playing field than ever before.  

Market infrastructure is at an important crossroads with the future uncertain for electronic trading, central counterparties, integrated product structures and the technological changes that will drive the way forward.

All business activity is a function of supply and demand.  Many of the institutional investors that make their securities available for loan are in a state of flux.  Some have pulled out in whole or in part.  Others had exited and later returned.  The majority of lenders stayed the course and deserve considerable thanks from the agents, prime brokers and traders.  (Although some would argue they had no choice but to stay in the game and may yet exit in future when their fortunes change.) The demand side of the market - the hedge funds and proprietary trading firms - have seen improved performances this year and all will be watching for whether this upturn is sustained.

So one year on, the business has survived the greatest onslaught it has ever experienced and emerged a little battle scarred and smaller than its peak levels of a couple of years ago - but still huge compared to where it was a decade ago. 

I would argue securities lending is still under siege, but "siege" is now with a lower case "s" as opposed to the capital "S".

I'd like to thank all of my readers, contributors, commentators and survey/poll respondents over the past year for your time and comments, and I look forward to even more engagement in the year to come!