How is the securities lending industry doing in South Africa?
The market is very much alive, but it’s probably going through what Europe went through between 2008 and 2014. In Europe during that period lenders pulled away, liquidity dropped and prices moved up. That’s not exactly what’s happening here at the moment though, because we haven’t lost lenders by absolute numbers, we have lost volume by those lenders scaling down their portfolios.
Much of the time this is because they have either gone offshore or moved into passive funds. Passive investments can mean, for example, exchange-traded funds, which has taken stock away from the lending pool.
The South African market isn’t as deep or sophisticated as we would like at the moment, but we are working hard to change that. To put it in context, for Europe and the US, general collateral runs at anything between 10 and 20 basis points (bps), but in South Africa it’s 40 bps. From a European point of view, we look twice as lucrative, but if you look at the market and what’s actually out on loan, it’s not huge. The South African Securities Lending Association’s (SASLA) members only make up about 10 lending desks, working with just under $10 billion of fixed income and equity.
In terms of fee splits, 40 bps is not a great deal of fee to share and so it has to be a service and volume game.
What is the next big step for South Africa?
We are in an interesting situation because, currently, the Johannesburg Stock Exchange (JSE) guarantees settlement, which is something even Europe doesn’t offer. However, the JSE must find a way to continue this feature while migrating from a T+5 to a T+3 settlement cycle, which is happening on 11 July.
The only way that’s realistically happening is if the exchange has ample access to sufficient liquidity in stock borrowing, and in this regard we need to encourage more lenders in to boost liquidity. The coverage may only be needed for a few days or a week, but, across the market, it’s still a huge amount for the exchange to borrow at any one time. The JSE suggests that this may be a couple of thousand trades a day that need to be covered.
The JSE is about to start testing auto-borrow and auto-distribution capabilities, which will be essential to allowing this guarantee to continue in a T+3 environment.
How is SASLA involved in making this happen?
Our job is to serve our current lenders and make it as simple as possible for them to continue lending, and to provide education that we might encourage new lenders to make their holdings available and making sure they know what’s in it for them.
Most of the time, it’s a case of explaining the benefits of incremental gains on their portfolio, but sometimes we are still having to explain to market participants why allowing stocks they are long in to be sold short is not actually damaging to their portfolio. Besides the international literature, we have our own study in South Africa that shows that’s not the case in our marketplace.
Are there any opportunities for SASLA to expand to cover the rest of the African continent?
There are SASLA members that are encouraging and supporting the development of securities lending in Africa. I’m sure that they’d be happy to share their thoughts and experiences.
When this develops and they look for guidance in the likes of an industry body, then we will be happy to provide support. But for the moment we will remain South Africa-focused.
What are your goals as chairman of SASLA for the next 12 months?
SASLA’s main aim is to keep the regulator properly educated on the ramifications of the regulation it proposes and enacts. But that doesn’t mean we go running to the regulator’s office to complain every time something increases our costs.
We are focused on the regulation that affects more than just cost and actually makes it structurally difficult to continue our business.
Another issue is that, although we have been a cash collateral market for years, global trends towards non-cash have reached us and we’re finally starting to see a greater move to non-cash collateral. However, the regulatory framework we have in place really isn’t set up for non-cash.
Haircut requirements have been created for certain lenders where they require somewhere between a 5 and 15 percent haircut depending on collateral type, which is expensive and would incline a borrower towards cash.
At the same time, Basel III has made it punitive for banks to place cash collateral from a balance sheet perspective. If a bank borrows and gives cash collateral, it is exposed to counterparty risk and therefore must hold capital against it.
This means we have two regulations that are in complete contradiction of each other.
Do you find regulators in South Africa are sympathetic to these issues and open to negotiation with SASLA?
Yes, to their credit they are very open and always considered in their responses. In South Africa, it is our understanding that they have made the conscious decision not to be the first mover, although not to be the last one either, when it comes to regulation.
This method allows us as an industry to learn the lessons from Europe and the US before deciding upon our own framework.
Do you find that South Africa is modelling itself on either the European or US regulatory models?
We are happy to be led by the G20’s Financial Stability Board. We are a G20 signatory so we have to apply its rulings—but maybe not be first.
Having said that, for our industry we feel that the European Securities and Markets Authority is the most vocal body and so naturally we are more inclined to look to Europe to get an idea of market trends and regulation than we are the US.
What’s your understanding of the South African regulator’s thoughts on CCPs?
I think that’s a question for the regulator. Even in our industry there is a difference in opinions in this regard. My immediate concern would be the extent of the cost impact and a possible knock-on effect on liquidity.