The new normal
02 June 2015
Regulation dominated proceedings at EquiLend鈥檚 client event in London
Image: Shutterstock
New regulation is dominating the new age of securities finance, but markets are adjusting as participants come to terms with how best to incorporate requirements into their practices and systems, heard attendees of the EquiLend client event in London.
Felix Oegerli, head of trading, sales and capital markets at Z眉rcher Kantonalbank, kicked off a panel discussion on 鈥楾he New Age of Securities 麻豆影视传媒鈥� by saying that the business itself remains relatively unchanged, at least in terms of how it is conducted.
What have changed are the infrastructure and markets, particularly since the financial crisis struck in 2007 and 2008, when legislators were given a mandate to rein in banks and other institutions. The 鈥榥ew normal鈥�, said Oegerli, is one in which securities finance is recognised as important and outsiders respect it.
The onslaught of regulation should not detract from this, according to Oegerli. 鈥淚鈥檓 not emotional about regulation鈥攊t is what is.鈥�
A consequence of new regulations has been a widely seen uptake in non-cash collateral, although Oegerli noted that cash collateral is still the preferred choice in Europe, because each trade is different and markets are cyclical.
The decision whether to take cash or non-cash 鈥渄epends on the relative funding cost of the trading book,鈥� he explained, adding that there is a lot of inventory around at the moment and lenders are willing to meet the demands on borrowers.
Anthony Mirabile, global head of securities lending and inventory management operations at Goldman Sachs, pointed to the EU鈥檚 Central Securities Depositories Regulation (CSDR) and Target2-Securities (T2S) as 鈥渙pportunities鈥� that will create a single entry point to a fungible pool of assets with underlying issuer CSDs.
鈥淲e should be embracing the regulatory changes coming鈥�, said Mirabile, because they offer efficiency and scalability. 鈥淩egulation is going to help people like me make technical development more compelling.鈥�
Oegerli added that the trading floor won鈥檛 see improvements straight away, but the likes of the CSDR and T2S are good bases for the future. 鈥淲e have the roads鈥攏ow we need the cars.鈥�
The long-lasting worry about how securities finance will pay for implementing regulatory requirements is becoming easier to quell, said Mirabile.
鈥淚t鈥檚 a rational cost that you can explain,鈥� he said.
Data to-do-list
Big data was the subject of a later panel in which information technology experts attempted to pin down a working definition.
The panel concluded that the problem with 鈥榖ig data鈥� is that there are so many definitions. To understand its importance, businesses need to look at the volume of information they hold.
DataLend director Chris Benedict said EquiLend has somewhere between 8 and 9 terabytes, which is an 鈥渋ncredible volume of data鈥�. The trick to making the most of it is having a variety of data sets, from product type to fees, with which to work. Then it needs to presented in the correct manner, added Benedict.
The final panel of the day turned attendees鈥� attention to the pending securities finance transaction regulations.
Kevin McNulty, CEO of the International Securities Lending Association (ISLA), said the EU鈥檚 legislation might be finalised in the next few weeks.
ISLA is a 鈥渓ittle less optimistic that this project will be a small one鈥�, he said, because the European Commission wants to see everything that the securities finance market does in the EU.
The European Commission鈥檚 proposal on securities finance transaction reporting was developed in response to the Financial Stability Board鈥檚 investigation into 鈥榮hadow banking鈥�.
The proposal will see market participants reporting to trade repositories to achieve more transparent markets. All counterparties doing business within the EU must report trades, including repo and securities lending and borrowing transactions.
Under the proposal, all UCITS and alternative investment funds must disclose more information about securities finance transactions to investors, while rules surrounding collateral rehypothecation will also change.
In terms of transaction reporting to trade repositories, ISLA stated in a letter to regulators in April that it generally supports detailed position level reporting of securities lending transactions as it will provide supervisors with 鈥渂etter quality, more quickly actionable, information for the monitoring of risks to financial stability鈥�.
It is 鈥渉ighly unlikely that you鈥檒l have to report anything in the next 18 months鈥�, added McNulty.
Brian Lamb, CEO of EquiLend, said he is worried about the EU鈥檚 proposed regulation because it is very different to what the FSB is considering. There is also a perception that regulators will be able to prevent another financial crisis if they have access to lots of securities finance data, which just isn鈥檛 true, he added.
Felix Oegerli, head of trading, sales and capital markets at Z眉rcher Kantonalbank, kicked off a panel discussion on 鈥楾he New Age of Securities 麻豆影视传媒鈥� by saying that the business itself remains relatively unchanged, at least in terms of how it is conducted.
What have changed are the infrastructure and markets, particularly since the financial crisis struck in 2007 and 2008, when legislators were given a mandate to rein in banks and other institutions. The 鈥榥ew normal鈥�, said Oegerli, is one in which securities finance is recognised as important and outsiders respect it.
The onslaught of regulation should not detract from this, according to Oegerli. 鈥淚鈥檓 not emotional about regulation鈥攊t is what is.鈥�
A consequence of new regulations has been a widely seen uptake in non-cash collateral, although Oegerli noted that cash collateral is still the preferred choice in Europe, because each trade is different and markets are cyclical.
The decision whether to take cash or non-cash 鈥渄epends on the relative funding cost of the trading book,鈥� he explained, adding that there is a lot of inventory around at the moment and lenders are willing to meet the demands on borrowers.
Anthony Mirabile, global head of securities lending and inventory management operations at Goldman Sachs, pointed to the EU鈥檚 Central Securities Depositories Regulation (CSDR) and Target2-Securities (T2S) as 鈥渙pportunities鈥� that will create a single entry point to a fungible pool of assets with underlying issuer CSDs.
鈥淲e should be embracing the regulatory changes coming鈥�, said Mirabile, because they offer efficiency and scalability. 鈥淩egulation is going to help people like me make technical development more compelling.鈥�
Oegerli added that the trading floor won鈥檛 see improvements straight away, but the likes of the CSDR and T2S are good bases for the future. 鈥淲e have the roads鈥攏ow we need the cars.鈥�
The long-lasting worry about how securities finance will pay for implementing regulatory requirements is becoming easier to quell, said Mirabile.
鈥淚t鈥檚 a rational cost that you can explain,鈥� he said.
Data to-do-list
Big data was the subject of a later panel in which information technology experts attempted to pin down a working definition.
The panel concluded that the problem with 鈥榖ig data鈥� is that there are so many definitions. To understand its importance, businesses need to look at the volume of information they hold.
DataLend director Chris Benedict said EquiLend has somewhere between 8 and 9 terabytes, which is an 鈥渋ncredible volume of data鈥�. The trick to making the most of it is having a variety of data sets, from product type to fees, with which to work. Then it needs to presented in the correct manner, added Benedict.
The final panel of the day turned attendees鈥� attention to the pending securities finance transaction regulations.
Kevin McNulty, CEO of the International Securities Lending Association (ISLA), said the EU鈥檚 legislation might be finalised in the next few weeks.
ISLA is a 鈥渓ittle less optimistic that this project will be a small one鈥�, he said, because the European Commission wants to see everything that the securities finance market does in the EU.
The European Commission鈥檚 proposal on securities finance transaction reporting was developed in response to the Financial Stability Board鈥檚 investigation into 鈥榮hadow banking鈥�.
The proposal will see market participants reporting to trade repositories to achieve more transparent markets. All counterparties doing business within the EU must report trades, including repo and securities lending and borrowing transactions.
Under the proposal, all UCITS and alternative investment funds must disclose more information about securities finance transactions to investors, while rules surrounding collateral rehypothecation will also change.
In terms of transaction reporting to trade repositories, ISLA stated in a letter to regulators in April that it generally supports detailed position level reporting of securities lending transactions as it will provide supervisors with 鈥渂etter quality, more quickly actionable, information for the monitoring of risks to financial stability鈥�.
It is 鈥渉ighly unlikely that you鈥檒l have to report anything in the next 18 months鈥�, added McNulty.
Brian Lamb, CEO of EquiLend, said he is worried about the EU鈥檚 proposed regulation because it is very different to what the FSB is considering. There is also a perception that regulators will be able to prevent another financial crisis if they have access to lots of securities finance data, which just isn鈥檛 true, he added.
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