Securities Lending Today

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.

 

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.

Securities Lending - Collateral Management, Performance Measurement and Central Counterparty

Conference season begins today with the IMN European Beneficial Owners conference in London.  I am fortunate that I will be on several panels contributing to some of the key issues that face the business today.   I am always an enthusiastic participant as I consider myself fortunate in having the opportunity to put across my point of view.  Additionally over the next few conferences you will have an opportunity to see my two main companies represented – more on Trading Apps and FinTuition later.

Collateral Management

This panel will explore the different issues related to the cash versus non-cash collateral debate.   I will argue that it is no longer a question of one or the other.  The new reality is that lenders can’t simply choose one or the other – they must have the capability to deal with both.  Partly as a response to regulatory changes, partly to take advantage of revenue opportunities.  The old paradigm no longer applies. 

Maximising and Measuring Programme Performance

My second panel at IMN looks at the decision-making process and measurement of performance.  There are no hard answers here, just a series of choices that a beneficial owner needs to make.

Trading Apps

I have worked at a number of firms that have leading edge front-end technology, and this has given us a profitable advantage over competitors.   Yet generally trading desks in securities finance often have to make due with low-tech work-arounds that often rely on stand-alone spreadsheets to make up for the gaps.  Trading Apps provides users with unique solutions that combine our experienced business people with the very best in IT.  Focused on the front-end, the Trading Apps products make a difference to the bottom line.  Want to know more?  Visit our stand at the IMN conference and at the RMA Annual Conference on Securities Lending in Florida on October 10-13.

Central Counterparty

I will be covering this topic in my presentation at the GSL Dutch Summit next week.  If you read some articles – like the one in this morning’s Financial News – you would think that the topic hasn’t moved on in the past two years.  If instead you were at the SecFinex presentation last week you saw a challenging, interactive debate between the panellists and audience.   The issues are defined, questions remain, but there is more clarity today than ever before.

FinTuition

FinTuition is the leading training company on securities finance, hedge fund and operations.  We operate the securities lending training for ISLA (the European trade association) and CASLA (the Canadian trade association.  We will be bringing the Introduction to Securities Lending courses to Frankfurt (8 November), Stockholm (9 November) and London (22 November).  I am also really excited about my new course “Global Securities Lending” a two-day course starting on 30 November.  It is targeted at experienced securities lending people who want to discuss and debate the complexities of the business today and tomorrow.  FinTuition is one of the sponsors of the GSL Dutch Summit.

I look forward to seeing you in London, Amsterdam or Naples, Florida in the coming weeks.

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 29 June - 1 July 2011

Another weekly update from Jacob H Schmidt, CEO, Schmidt Research Partners Ltd. 

Weekly Commentary on Financial Markets: 29-June – 1 July 2011

Risk-on , risk–off, risk-on seems to be the pattern, due to the many political, macro and some micro events.

While Greece’s parliament voted in favour of both the austerity package in general (Wednesday) and its implementation (Thursday), many Greeks went to the streets. As soon as the vote went though the markets lost interest in the story and moved on. French and German banks were reported to support an extension of bond maturities by up to 30 years with a coupon of 5.5%. The rumour has it that these bonds will be held such that they would not have to be marked-to-market. Assuming that the principal is guaranteed (some called this plan a European Brady) the bonds real price is between 30-50 (assuming current yields of 11-20%). However the real issue is: can Greece afford it.  While a 5.5% COUPON sounds generous (much cheaper than the 20% yields in the markets) Greece cannot afford 5.5% on EURO 350 b. Hence what Greece really needs (and the markets keep telling the politicians) is a significant haircut on the stock of debt PLUS a reduction in interest rates. The experience in LATAM shows us that a Brady plan is the last step of any restructuring, and it is painful: Mexico got 30%, Poland 50%, Bulgaria 70%. And the coupons were low too. Hence we believe that a real Brady is to come at some point, once the default and / or big discount in a restructuring has been accepted. In any event, the numbers tell more than a 1000 words. After the vote Greek 5 year CDS have rallied from 2170 basispoints to 2020 today, but still higher than last week’s 1950 bp. Greece’s aid for the next 3 years (2014) will be in the EURO 195 b range, without guarantee that the lenders will get their money back. Some bankers and politicians have even come up with a “Marshall Plan” idea for Greece. A very good idea, but the timing might be premature.

Strong US data on Friday helped markets to continue a summer rally (as forecast by us two weeks ago), and with the earnings season starting next week, the equity markets might continue to rally.

Interestingly the equity markets seem to shrug off the US debt ceiling issue, which will have to be dealt with in the next 2-3 weeks.  The rating agencies (again the power brokers, to our surprise) have warned that any delay in payments et al could lead to a selective default. While a delay of this matter would be a serious error of judgment of the politicians and the markets’ reaction might be very negative (for a short period of time) the rating agencies find themselves in a tricky situation: if they downgrade the USA, they might lose their oligopoly, if they do not react, the markets will accuse them of being hypocritical. We believe that ratings on sovereigns which are highly political have nothing to do with a proper credit analysis, but rather reflect a view on politics. 

More news of civil unrest in China reaching us, potentially a bigger risk than the slow down – soft landing of the economy. In political history states fail not because of economic or financial problems but because it becomes impossible to administer them (see Roman Empire, USSR et  al). China might  be on a similar path.

Other good news included Christine Lagarde’s appointment as the IMF’s first female MD as well as the news regarding DSK’s lifting of the bail after revelations about the hotel maid’s back ground. DSK might be back in the election game.

Outlook:

Summer rally likely continue here to push markets to new highs. Increased chance of shocks due to more systematic and political risks.

Conclusion: As I wrote last week: after quick fix of Greece situation repeat of Lehman 2008 averted, but by no means solved. US debt ceiling, China unrests, political woes in MENA et al pose plenty risks for investors.

Visit Jacob's blog at http://jacobhschmidt.blogspot.com/.  Jacob teaches a series of hedge fund related courses at FinTuition.  His next course is Performance Analysis of Hedge Funds on 6-7 September in London.