A trier’s market


Attendees of Finadium’s Investors in Securities Lending Conference heard how RWA ratings are influencing behaviour and peer-to-peer lending is on the rise

Finadium’s Investors in Securities Lending Conferences, held in New York and London, threatened to shake-up an otherwise familiar event schedule for the would-be securities finance professional, and the London iteration didn’t disappoint.

London attendees heard how risk-weighted asset (RWA) ratings under Basel III are dictating the attractiveness of assets. This has created a buyer’s market, with borrowers choosing which lenders they trade with on the basis of the RWA ratings of their available stock.

According to panellists, Basel III’s balance sheet management rules have significantly affected certain borrowers to favour lenders without RWA issues in order to avoid exposure limits.

The total loss-absorbing capacity (TLAC) standard for globally systemically important banks (G-SIBs), which are part of Basel III’s balance sheet requirements, state that G-SIBs must meet a minimum TLAC requirement of at least 16 percent of RWA from 1 January 2019. This will increase to 18 percent on 1 January 2022.

Minimum TLAC must also be at least 6 percent of the Basel III leverage ratio exposure from 1 January 2019 and at least 6.75 percent from 1 January 2022.

A panellist added that the jurisdiction a lender is based in and the netting opportunities available in a trade are just some of the factors borrowers consider when choosing a lender.

Peer-to-peer lending is one alternative route to market for beneficial owners that are struggling to lend out their assets, although a panel representing some of the largest agent lenders in the market claimed to be unperturbed by the their clients’ increasing interest in disintermediation.

The entire panel agreed that looking to cut costs and maximise revenues through more streamlined trading structures was natural and something that has always existing within the market.

One panellist stated: “It will be a very small part of the market for the most sophisticated beneficial owners. If you’re a link in the chain but you can’t add clear value then you will be cut.”

Another panellist said the rise of peer-to-peer lending is likely to help improve liquidity, which is a key concern for European market participants in the context of the European Central Bank’s public sector asset purchase programme.

Peer-to-peer lending has accelerated thanks to the launch of a number of technology solutions built to facilitate direct asset transfers.

Platforms such as Elixium, which launched in 2016, now enable clients to utilise excess cash assets by directly trading with counterparties that might not otherwise be visible.

Missed revenue opportunities

James Palmer, product specialist at DataLend, revealed in a presentation at the conference in London that securities lending revenue for Q1 2017 hit $2.05 billion, down $247 million from Q1 2016.

The drop off could have been due to poor equity revenue that was partly mitigated by an uptick in fixed income revenue. Palmer put this down to improved collateral valuations.

Equity revenue fell from $1.93 billion in Q4 2016 to $1.53 billion in Q1 2017. A closer look at DataLend’s figures showed that this loss was caused by a significant decrease in borrowing fees for a handful of red hot securities that dominated lending revenues last year.

The shorting favourites of 2016, namely, Nordic tech firm Fingerprint, South Korean healthcare provider Celltrion, and Tesla in the US, have also all come off the boil, causing a knock-on effect on lending revenue.

According to DataLend, revenue from hot securities, meaning anything that earns 250 basis points (or more) in borrow fees, dropped from $1.19 billion of the total $1.93 billion earned in Q4 2016, to $793 million worth of the total $1.53 billion in Q1 2017.

This trend began to form in Q4 last year, with revenue at the close of the year down from its yearly peak in Q3, but the effect on securities lending revenue only really came into focus with the first quarterly reports of this year.

The slow start to the year was reflected in the quarterly results of some of the largest entities in the market, with major agent lenders, such as BNY Mellon and BlackRock, posting lower revenue figures.

Beneficial owners are also “leaving money on the table” by failing to engage in scrip options, panellists warned.

As much as 80 percent of scrip options are being concluded sub-optimally, meaning a significant revenue opportunity is being missed.

According to IHS Markit’s latest market report, the total value of European scrip dividends has jumped 10-fold over the last decade, to reach €26 billion in 2016.

IHS Markit analyst Simon Colvin said: “Scrip dividends are a growing part of the industry’s revenue mix.”

“The incremental revenue generated does not necessarily incur any additional risk due to the sub-optimal elections chosen by a large part of the beneficial owners community.”

Another conference panellist representing a large agent lender commented: “It’s so annoying to see so much money being left on the table.”

Attendees heard that agent lenders must improve communication with their clients to ensure they are optimising their strategies around scrip options.

The importance of focusing on scrip options has come into sharp focus. Recent political events have caused major economic upheaval and significantly increased the potential revenue to be generated from scrip options and associated trades.

IHS Markit clarified the value of scrip trades for beneficial owners. Last year, lenders earned $106 million in securities lending revenue from the 85 scrip dividends paid by Stoxx 600 constituents, representing 7.2 percent of the European securities lending revenue generated last year.

We’ll be CCP-ing you

Finadium’s New York and London agendas were the first in a while to deny attendees a dedicated central counterparty (CCP) panel.

Speaking on the decision to forgo a discussion on CCPs, Finadium managing principal and conference chairman Josh Galper said: “We look forward to more information from CCPs in securities lending, including their benefits in pricing and liquidity.”

He added that the door is open to a CCP-focused panel at future events.

The absence of a CCP panel was just one of the ways Finadium sought to shake things up in the securities lending conference circuit.

Conference sponsors, made of agent lenders, broker-dealers and data providers, were limited to eight delegates each to ensure that beneficial owners made up a significant proportion of the events attendees.

According to Finadium, just over half of the event’s attendees were beneficial owners, with delegates primarily representing pension funds and insurance companies.

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