France
19 March 2019
While growth in France’s lending revenues may inspire feelings of optimism for the rest of 2019, challenges around the unbalanced lendable and borrow demand, regulation and political factors are causing some unrest for France
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While securities lending in France is experiencing growth, there is a ‘je ne sais quoi’ vibe around the murky unknown areas of Brexit, the upcoming Securities Financing Transactions Regulation (SFTR) and ongoing frayed tensions around the world.
Some of these concerns that lurked on the minds of French investors, for example the strained relationships between France, the US, the UK and Russia, as a result of the civil war in Syria, have been allayed at the beginning of this year. Alongside this, France could actually benefit from Brexit, using the crisis of an independent Britain to position Paris as a global financial hub, replacing London. Moving away from last year’s Syria and Brexit worries, Tom Elliot, international investment strategist, DeVere Group, exclaims that France’s main problem, as far as investors are concerned, is the risk that Macron fails his “self-appointed task of modernising labour law and tackling protected interests”.
He remarks: “If Macron can’t do this, who can?”
Grande growth
Worries aside, France has experienced decent growth over the past few years. Data from IHS Markit found that French equities reached $539 million in 2018, 5.6 percent higher than 2017. Sam Pierson, director of securities finance at IHS Markit, explains that the increase in revenue was driven by increasing loan balances, partially offset by declining average fees and, in fact, the $6.9 billion in average loan balances was the highest since 2011.
Although revenues for French equities experienced growth, they did not keep pace with the broader Eurozone, Pierson found. In 2017, France delivered 27 percent of regional equity lending revenues, but that dropped to 25 percent in 2018. Lendable assets have experienced continuous growth; the $390 billion for French equities in 2018 is the highest on record despite declining market valuations in the latter half of the year. This year is off to a promising start, with French equity lending revenues up 17 percent year on year through the end of February.
Technology, trends, and opportunities
In terms of trends, Pierson suggests that clients have been adopting more technology and have been more systematic in data use. This change, he says, is generating demand for more granular data, such as transaction level feeds.
He expands: “Previously, clients would have relied solely on the security level aggregation of lending data.”
“There has also been a greater focus on the timeliness of data. For instance, intraday and pending transaction data is providing pricing transparency for trading decisions. On the trading side, we’ve seen some consolidation of functions.”
“Enabling the consolidation of securities lending and swap trading desks, as well as enabling the formation of centralised funding groups, including repo trading. We expect to see further implementation of technology to streamline processes, which allows traders and other stakeholders to efficiently operate in the current market environment.”
Pierson continues: “We believe the market will continue to adopt technology, streamlining the operations for securities lending trading, performance measurement and regulatory reporting. While it’s impossible to forecast demand, the trend over the last couple of years has been positive and revenues are picking up on the margin.”
“French equity loan balances have increased 22 percent year-to-date (YTD), while lendable assets have only grown 14 percent, which helps to explain the uptick in Q1 fees.”
Pierson recognises that SFTR reporting is a significant task for the industry, but adds that progress toward effective solutions is “well underway” for most industry participants, which should make for a smooth implementation.
“With lending revenues trending higher on the back of robust borrow demand, and a marginal YTD uptick in fees, there is cause for optimism looking ahead to rest of 2019.”
This growth is continuing to attract firms to France. For example, LCH recently announced that it will be building a sponsored clearing at its Paris-based central counterparty (CCP), LCH SA, which is expected to launch later this year.
Paul Elkins, head of product development, RepoClear and EquityClear, LCH, explained: “Currently, RepoClear’s sponsored clearing service has been live at London-based clearing house, LCH Ltd, since September 2017.”
“Going back quite a few years, LCH decided to enable all of their members to clear all of their European debt in a single CCP.”
Elkins explained: “LCH Group operates two central counterparties (CCPs), LCH Limited and LCH SA, in London and Paris, respectively. The London CCP clears the repos and debt that have been traditionally cleared and settled in an international central securities depository (ICSD) environment. The French CCP historically cleared euro debt that was settled in local CSDs environment in France, Italy and Spain.”
Hurdles on the horizon
Like most other countries, regulation is one of France’s key upcoming challenges. It is perhaps unsurprising that SFTR will be the main regulation keeping people awake at night.
Discussing regulatory challenges, Pierson commented: “The biggest regulatory challenges for the industry in France are the second Markets in Financial Instrument Directive (MiFID II) and SFTR.”
“At this point, most of the work toward MiFID II compliance is complete, making SFTR the primary focus of this industry.”
“Over the past year, the anticipation of this reporting requirement has generated a significant uptick in participation for our solution. Last year, market participants were debating whether they should build in-house reporting solutions or purchase them from third parties. Most of those participants have chosen to partner with data vendors, minimising costs and assuring streamlined compliance.”
“We are confident that the industry will be well prepared to adopt this reporting requirement in 2020, when it goes live.”
Meanwhile, discussing challenges more broadly, Pierson noted that the effort required to adopt MiFID II, along with best execution concept for securities lending transactions, has been underway for years, yet remains relevant.
From a structural perspective, Pierson cited that the securities lending market in France has similar challenges to other developed equity markets; the advances in market value over the last decade have seen the growth in lendable assets significantly outstrip the growth in borrow demand, leading to compressed spreads and lower revenues.
Pierson commented: “The average fee for French equity loans in 2018 was the lowest on record going back to 2006.”
“That said, borrow demand has increased year on year for the last three years and average fees are on pace to surpass 2018 through the end of February, creating some cause for optimism as we look to the remainder of 2019 and beyond.”
Meanwhile, Elliot further drew upon the problems in the political space and potential hurdles on the horizon there.
Looking at the risk of Macron failing his labour law modernisation, he said: “Will the yellow vest movement provide morph onto a permanent populist feature of French politics, perhaps creating its own political party? Disruptive, asking questions, but not offering any solutions beyond simplistic mantras (for example ‘tax the rich’).”
“If so, will it lead to support for the far right, giving the Front National a wider support base in the next national elections? Or will it split the protest vote?”
Leaving food for thought, Elliot mused: “Is Macron/France capable of leading the EU? The EU needs strong leadership from its largest members to confront and solve problems such as slow growth, immigration, Trump, the flawed euro project. Germany is unable to do this. German chancellor Angela Merkel, is now much weaker at home and so less powerful within the EU. Is France able to do so?”
Some of these concerns that lurked on the minds of French investors, for example the strained relationships between France, the US, the UK and Russia, as a result of the civil war in Syria, have been allayed at the beginning of this year. Alongside this, France could actually benefit from Brexit, using the crisis of an independent Britain to position Paris as a global financial hub, replacing London. Moving away from last year’s Syria and Brexit worries, Tom Elliot, international investment strategist, DeVere Group, exclaims that France’s main problem, as far as investors are concerned, is the risk that Macron fails his “self-appointed task of modernising labour law and tackling protected interests”.
He remarks: “If Macron can’t do this, who can?”
Grande growth
Worries aside, France has experienced decent growth over the past few years. Data from IHS Markit found that French equities reached $539 million in 2018, 5.6 percent higher than 2017. Sam Pierson, director of securities finance at IHS Markit, explains that the increase in revenue was driven by increasing loan balances, partially offset by declining average fees and, in fact, the $6.9 billion in average loan balances was the highest since 2011.
Although revenues for French equities experienced growth, they did not keep pace with the broader Eurozone, Pierson found. In 2017, France delivered 27 percent of regional equity lending revenues, but that dropped to 25 percent in 2018. Lendable assets have experienced continuous growth; the $390 billion for French equities in 2018 is the highest on record despite declining market valuations in the latter half of the year. This year is off to a promising start, with French equity lending revenues up 17 percent year on year through the end of February.
Technology, trends, and opportunities
In terms of trends, Pierson suggests that clients have been adopting more technology and have been more systematic in data use. This change, he says, is generating demand for more granular data, such as transaction level feeds.
He expands: “Previously, clients would have relied solely on the security level aggregation of lending data.”
“There has also been a greater focus on the timeliness of data. For instance, intraday and pending transaction data is providing pricing transparency for trading decisions. On the trading side, we’ve seen some consolidation of functions.”
“Enabling the consolidation of securities lending and swap trading desks, as well as enabling the formation of centralised funding groups, including repo trading. We expect to see further implementation of technology to streamline processes, which allows traders and other stakeholders to efficiently operate in the current market environment.”
Pierson continues: “We believe the market will continue to adopt technology, streamlining the operations for securities lending trading, performance measurement and regulatory reporting. While it’s impossible to forecast demand, the trend over the last couple of years has been positive and revenues are picking up on the margin.”
“French equity loan balances have increased 22 percent year-to-date (YTD), while lendable assets have only grown 14 percent, which helps to explain the uptick in Q1 fees.”
Pierson recognises that SFTR reporting is a significant task for the industry, but adds that progress toward effective solutions is “well underway” for most industry participants, which should make for a smooth implementation.
“With lending revenues trending higher on the back of robust borrow demand, and a marginal YTD uptick in fees, there is cause for optimism looking ahead to rest of 2019.”
This growth is continuing to attract firms to France. For example, LCH recently announced that it will be building a sponsored clearing at its Paris-based central counterparty (CCP), LCH SA, which is expected to launch later this year.
Paul Elkins, head of product development, RepoClear and EquityClear, LCH, explained: “Currently, RepoClear’s sponsored clearing service has been live at London-based clearing house, LCH Ltd, since September 2017.”
“Going back quite a few years, LCH decided to enable all of their members to clear all of their European debt in a single CCP.”
Elkins explained: “LCH Group operates two central counterparties (CCPs), LCH Limited and LCH SA, in London and Paris, respectively. The London CCP clears the repos and debt that have been traditionally cleared and settled in an international central securities depository (ICSD) environment. The French CCP historically cleared euro debt that was settled in local CSDs environment in France, Italy and Spain.”
Hurdles on the horizon
Like most other countries, regulation is one of France’s key upcoming challenges. It is perhaps unsurprising that SFTR will be the main regulation keeping people awake at night.
Discussing regulatory challenges, Pierson commented: “The biggest regulatory challenges for the industry in France are the second Markets in Financial Instrument Directive (MiFID II) and SFTR.”
“At this point, most of the work toward MiFID II compliance is complete, making SFTR the primary focus of this industry.”
“Over the past year, the anticipation of this reporting requirement has generated a significant uptick in participation for our solution. Last year, market participants were debating whether they should build in-house reporting solutions or purchase them from third parties. Most of those participants have chosen to partner with data vendors, minimising costs and assuring streamlined compliance.”
“We are confident that the industry will be well prepared to adopt this reporting requirement in 2020, when it goes live.”
Meanwhile, discussing challenges more broadly, Pierson noted that the effort required to adopt MiFID II, along with best execution concept for securities lending transactions, has been underway for years, yet remains relevant.
From a structural perspective, Pierson cited that the securities lending market in France has similar challenges to other developed equity markets; the advances in market value over the last decade have seen the growth in lendable assets significantly outstrip the growth in borrow demand, leading to compressed spreads and lower revenues.
Pierson commented: “The average fee for French equity loans in 2018 was the lowest on record going back to 2006.”
“That said, borrow demand has increased year on year for the last three years and average fees are on pace to surpass 2018 through the end of February, creating some cause for optimism as we look to the remainder of 2019 and beyond.”
Meanwhile, Elliot further drew upon the problems in the political space and potential hurdles on the horizon there.
Looking at the risk of Macron failing his labour law modernisation, he said: “Will the yellow vest movement provide morph onto a permanent populist feature of French politics, perhaps creating its own political party? Disruptive, asking questions, but not offering any solutions beyond simplistic mantras (for example ‘tax the rich’).”
“If so, will it lead to support for the far right, giving the Front National a wider support base in the next national elections? Or will it split the protest vote?”
Leaving food for thought, Elliot mused: “Is Macron/France capable of leading the EU? The EU needs strong leadership from its largest members to confront and solve problems such as slow growth, immigration, Trump, the flawed euro project. Germany is unable to do this. German chancellor Angela Merkel, is now much weaker at home and so less powerful within the EU. Is France able to do so?”
NO FEE, NO RISK
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100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
