France
France is by no means a mere observer in the EU’s securities marketplace, but for now, it may be that slow and steady wins the race

It’s that time of year where, in the French Alps, the snow has all-but melted and resorts are shuttering up for the season. Traditionally though, things are also getting heated in the securities lending utilisation charts. The last three years have seen their peaks in utilisation levels in May, quickly followed by a steep drop. Generally, they’re in the bottom of the valley by July.

At the beginning of 2014, specifically, the amounts of securities available and the demand for borrowing rose at a similarly steady rate, but as availability plateaued—or rather, met with more regular, relatively small, peaks and troughs, the demand to borrow met with a relatively steep slope followed by a steady recovery in the months that followed.

Reflecting this, utilisation saw its high in May and its crash in July, and it was not until September that the figure started to creep upwards again. The graph saw another peak at the end of the year, but it was not to be sustained, and the figure was dragging again by the time 2015 was underway.

It might appear volatile, but 2014 did mirror the utilisation seen in the past two years, at least to an extent. In both 2012 and 2013 there was a spike around May, and another smaller spike towards the end of the year. For these two subsequent years, the lowest point came just after this second spike.

This repeated pattern points to a seasonal effect, most likely linked to the ebb and flow of the market, rather than any external factors. What makes 2014’s figures a little different is that the peaks are falling short while troughs don’t dip quite as low—the gap between the highs and lows has lessened significantly.

In 2012 and 2013, the springtime utilisation peaks topped out at around 17 percent, before tumbling back to 12 percent in 2012, and to 9 percent in 2013. The second peaks reached just over 10 percent, and about 13 percent, respectively, and both years, the lowest point of utilisation was about 5 percent.

For 2014, both the first and second peaks reached close to 13 percent, before falling to about 7 percent and 9 percent, respectively. The lowest point of the year fell in September at just under 7 percent.

This relative steadiness could be attributed to the increase in borrowing, and to a general flurry of activity in the European market as a whole. In turn, this has been caused, at least partially, by the political volatility in the EU.
In the aftermath of the Greek elections, the region has been rocked by the possibility that Greece could leave the EU, and, according to Mark Loomes, a market analyst at SunGard, this has led to increased activity in the market.

“France has broadly seen some concerns growing on the back of the potential Greek exit, which has translated into greater activity in the securities lending market—particularly with sovereign bonds, which have seen borrowing volumes climb about 125 percent since January 2014.”

That said, this unrest is a mere blip in comparison to the upheavals of the past, specifically, the global financial crisis in 2008. According to Loomes, France is making a comeback, even if it isn’t outpacing its peers at this point.

He says: “Since 2008, we have seen greater securities lending activity returning across the board, and though France is no different, it is also fairly middle-of-the-road in this regard.”

“Growing confidence in the financial markets has spurred greater reinvestment activity, while on the other hand increased short selling in the equity markets has also brought about the need for increased borrowing.”

“Last year’s dividend season also saw some of the highest borrowing volumes in recent years for the country, though it is still a little too early to see how this will pan out in 2015.”

In the current market, as the demand to borrow increases at a fast-but-steady pace, there is plenty of supply to cater to the appetite, and, as seen, the utilisation of securities is essentially following the same trends as the last few years. However, according to Anne-France Demarolle, head of liquidity management services for Societe Generale Securities Services, there could be at a steep incline in demand in the coming months.

She says: “We expect a surge in demand when all collateral requirements on over-the-counter (OTC) derivatives will be fully enforced.”

Under the new European Markets and Infrastructure Regulation (EMIR) rules, OTC derivatives will require more collateral, and will therefore be more expensive. This, Demarolle suggests, could lead to derivatives businesses borrowing additional securities to cover the new costs.

Historically, however, while the regulatory landscape has been volatile, and has probably affected all financial services markets, it can be difficult to judge the knock-on effect that individual changes have in real terms.

Loomes says: “It has been the case for the past few years that the growing complexities of the regulatory environment, and the uncertainties that regulations bring, have been dominating much of the talk and operations of financial insiders.”

“That said, associating any trends within the market directly to these changes is somewhat of an impossible task, and I suspect the true extent of their impact will only be seen when we look back with hindsight in some future date.”

Despite her predictions on EMIR, Demarolle points out that some issues anticipated by the industry don’t actually come to fruition, although she notes that it can be dangerous to assume that they won’t, and in fact, effects from regulation can work both ways.

“One could have feared that some of the new regulations like the ESMA guidelines for UCITS funds would weigh on securities on loan, due to the requirement to have the appropriate stress-testing policy in place when a UCITS receives collateral for at least 30 percent to its assets. In fact, this didn’t materialise as the asset managers adapted their framework in time.”

“Now, some recent guidance issued by the French local regulatory authority could have an impact on the way securities lending is conducted by asset managers.”

France’s market is one with sticking power, and while it has its fluctuations and may not be ahead of the European pack, it is certainly not lagging behind. While the regulatory landscape has the potential to knock market players off-course, last year’s utilisation figures show that, so far, they’ve got the reslience to see it through.

“There are two sides to every coin,” explains Demarolle.

“Each new regulation brings additional requirements to be complied with, which translates into additional costs for both providers and beneficial owners.”

“On the other hand, the new regulations contribute to demystifying what securities lending is, by providing more transparency on their use, their market participants and details of the trade. This will enable risk managers to be more comfortable with the product.”

Greater trust can only lead to more effective community, and while France may be in the midst of a low season, just like in the Alps, there’s always another peak on the horizon.

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