In February this year, Chris Kunkle took over from Curtis Knight as director, securities lending and market risk at the Risk Management Association (RMA). As a long term contributor to the work of the RMA, Kunkle spoke to Securities Lending Times about the work the association does, the issues the industry faces, and his hopes and plans for the future.
SLT: When you took over, what were your key priorities
and objectives for the RMA?
Kunkle: I've been part of sub-committees and three executive committees
at the RMA since 1994 so I've been keyed in on the areas the RMA focuses on for some time. This means it was easy for me to hit the ground running. I've also been on the other side, working for the banks and financial institutions, so I've got a good view of what the market needs.
Our first objective is to build on our work of creating communication and co-ordination between the various associations, organisations, regulators and businesses within the industry. We're working with various other associations such as PASLA and ISLA to educate regulators and members. In the last two years, there has been issue after issue that the financial markets have needed to deal with and we have been approached by regulators and institutions to increase the levels of education and understanding of the market.
SLT: The RMA is clear that it does not lobby for change. How does this affect your relationships with stakeholders?
Kunkle: Not being a lobbying organisation is a comfort to our members and the entities we deal with. The real positive is that we are seen as being less biased - our job is to get accurate information out there, whichever organisation wants it. The information is for everyone - brokers, participants, regulators and so on - and people come to the RMA because of our knowledge and experience.
SLT: How much is securities lending understood by the authorities?
Kunkle: The regulators are really trying to learn. We put on training courses for the examination staff at the OCC and the Fed, and we are doing a lot of work to educate the SEC about securities lending.
SLT: Compared to instruments such as derivatives and MBS, securities lending has flown under the radar somewhat during the recent turmoil. Is this a good thing?
Kunkle: Information is a good thing. I would hesitate to say we've been under the radar. For instance, in January 2006 the Wall Street Journal published an article critical of one aspect of securities lending and we spent some time challenging the article and educating clients and regulators.
Sophisticated clients like pension funds, public funds, endowments and mutual funds do have a good understanding of securities lending and no-one sees this as a risk-free business. They know there is an element of risk but they also understand there are ways to mitigate this - as evidenced by what happened when Lehman collapsed.
SLT: How have the events of the past couple of years affected the industry?
Kunkle: I believe the market in the US has moved from being more volume-based in the past to being value-based today. Specials and stocks with key needs are being borrowed and appropriately paid for in terms of the intrinsic value of the stock. Reinvestment is now a secondary activity.
There has been a contraction in the markets and I don't know if it will ever return to the levels we once saw. But I don't know if that's a bad thing. We are already on a slow upswing and as rates get increased, then the market will grow further.
SLT: The RMA has suggested that some of the new Basel rules may actually increase the risk within the market. Is this down to a lack of understanding of how the market works?
Kunkle: No, I don't think it's a lack of understanding. RMA has a capital working group (not affiliated with Securities Lending) that offers suggestions
on proposed legislation after all the banks have met and with Basel III we just want considerations made that will keep reporting fair.
They are simply suggestions; we are not lobbying for change. But as international regulators look at the issues within our sphere we look to provide an insight into what those regulations will mean to the industry.
SLT: Within the US, cash remains the most popular form of collateral. What are your views on this?
Kunkle: You have to look at how the market has developed. In Europe, there weren't the same restrictions on collateral as in the US. In the US, SEC Rule 15c3-3 restricts the collateral that a borrower is able to provide in a lending transaction. After the liquidity crisis, the market did look at the UK model, but regulators and some clients are still learning about different collateral issues in order to gain comfort or acceptance of it. But as the Lehman collapse demonstrated, it worked well on both sides.
The RMA Executive Committee is currently working on a White Paper with a couple of external organisations on this issue. There are benefits to the US market to provide highly liquid stocks as collateral and we want to explore the impacts of any changes to rule 15c3-3. This paper will be circulated throughout the industry, including to the regulators.
SLT: And finally, what are your ambitions for the future?
Kunkle: My first ambition is to build on our relationships and communication links with associations, members, clients and regulators in the industry. We can take the lead in communicating with other organisations and communicating to the industry as a whole. Globally, all the institutions working in the market are working toward similar goals so our ability to communicate information is key.
Secondly, we want to ensure regulators have all the information they need to make the right decisions. Regulators look to us because we are not biased, so we can help them look at all the facts on an independent basis.
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