Ann Doherty is moderating a panel that will consider the continued viability of the agent lender model. She tells Mark Dugdale what some of the key issues will be
How will your panel discussion define the traditional securities lending model?
By traditional securities lending model, we are referring to the typical beneficial owner-agent lender relationship accessing the broker market. We have reflected this in the representatives on the panel, who are running those lending desks, seeking collateral as treasurers, developing platforms, or managing the overall financing group.
What are the challenges to the traditional securities lending model that the panellists will discuss?
Since the financial crisis, the landscape for securities lending has evolved significantly. There have been changes in regulation, of course, which have resulted in an ongoing shift in supply and demand across a range of asset classes, products and regions. The various participants in the value chain have been affected in different ways. Some have had capital requirements that have led to changes in behaviour, while some have had new liquidity rules to contend with.
This is primarily about the borrowers, which have experienced mismatches at certain points of the financing chain. For them, securities lending has and always will be about financing. Now, we are seeing demand for high-quality liquid assets increase, so revenue from US treasuries is at an all time high, and US equities continue to dominate globally.
At the same time, there has been reduced liquidity in overnight and short-term repo. Borrowers are looking for new opportunities amid these traditional avenues. Our panel will consider some of these, including peer-to-peer (P2P) lending.
As P2P lending has begun to dominate discussions, have you seen central clearing slip from the limelight?
While central counterparties (CCPs) and market infrastructures have been represented as playing an increased role in the securities lending market, I think there is still work to be done there, because we haven’t seen significant shifts in liquidity. I would be happy to have that as one of the points of this panel, to discuss how significant the role of CCPs will be in the future.
What role is the need to optimise collateral playing?
With cash investment returns being where they are, there is a need for innovation. Many borrowers of securities need their cash in other places. A good example is derivatives activity, which requires significant margin. Those new rules are causing collateralised derivatives to mop up huge amounts of liquidity. As a result, innovation around securities collateral has moved forward in leaps and bounds over the last few years because borrowers have to be more innovative in terms of how they use collateral and what collateral they can give.
Lenders have to understand this shift and be more flexible about that collateralisation and the forms of collateral they will accept. It’s been one of the more nuanced shifts within the industry, particularly when overnight repo for cash has curtailed significantly. In the past, lenders might have swam only in the lane marked ‘securities lending’.
Now, there are new swimming lanes, marked ‘repo’ and ‘P2P lending’, for example, that lenders cannot ignore. Many lenders will need access to cash, or they might be lending out their long positions, so financing is important. It’s a concept that has a lot more credence now than in the past.