Italy
27 July 2010
Italy’s securities lending industry has followed the path of the rest of continental Europe over the past couple of years. But it has a couple of aces up its sleeve.
Image: Shutterstock
Not waving, not drowning. And in the holiday season, not really leaping or bounding, either. Italy’s securities lending industry has certainly suffered over the past couple of years, but it has seen steady growth since the start of the year.
This has, however come from the domestic market; the international institutions are still wary of getting their fingers burnt, and until the rest of the Eurozone countries start to make a mark, Italy’s growth will be restricted.
“The market has survived,” says Stefano Galli, part of the securities lending team at BNP Paribas in Milan. “It has survived like any other continental European market. The size has been reduced by what happened in the last two years, but we have seen some recovery this year. It’s been quiet again since mid-June, but I believe that’s simply because it’s summer and the market is never at its busiest at this time of year.”
Italy has traditionally been the third biggest market for securities lending within the Eurozone. All the major international banks have a presence in the market, which is bolstered by some serious local players. But with a heavy stock market focus on financial companies, it was in the eye of the storm during the downturn.
“The main index in Italy is mostly composed of financial stocks, which is much higher than in Germany and France,” says Galli. “And that means that the intervention of the regulators was much more important as they were the stocks attacked by speculators. But now, the regulators are working with others across Europe - they do understand and appreciate the importance of short selling and securities
lending.”
The regulators had to step in - in 2008 and 2009 short selling bans were put in place to keep the markets afloat, which led to some of the major international players withdrawing from securities lending activities as they searched for safer havens elsewhere in Europe.
“The derivatives market has picked up compared to 2008 and 2009, so we are seeing some activity there,” says Galli. “The recovery will be in part driven by the hedging of derivatives. Cash is interesting but it’s not the driver it once was.”
“We were badly hit by the short selling ban in 2008-09, and it took some people out of the market,” says Galli. “But now, if there is a spread, people will come back to the market. At the moment, there is not and it is difficult to make money.”
“We have lost a couple of broker-dealers, and this is a shame for us as we had good business relations with them - they were good borrowers of stocks. Otherwise the same people are trading as were a couple of years ago - proprietary traders and derivatives specialists. It’s not that there are that many fewer people in the market, it’s that they are carrying out less trading and looking at less risky trades.”
The Italian regulators have stopped taking initiatives on their own - they are looking to see what the EU is going to do.”
“The problem was that no-one knew what was going to happen,” says one broker-dealer, “The regulators in Italy were caught on the hop, I think, and it was difficult to make investment decisions when we didn’t have the confidence that those decisions wouldn’t be affected by events outside our control. But the situation has improved - the message now is that any new rules that come in will be the same for the whole of Europe, and they won’t be making quick decisions just for Italy.”
Although nothing has yet been decided, the new regulations coming out of the EU are not expected to include any serious restrictions that would affect the securities lending market. The recent stress testing of many of the region’s major banks has indicated that the vast majority are financially sound, and can continue to offer the same services as in the past - although the possibility of sovereign default was not considered.
As far as the drivers of the market are concerned, Italy doesn’t have the huge hedge funds seen in other parts of the world. However, there remains plenty of untapped opportunity.
“70 per cent of the demand for Italian stocks came from abroad, which makes us the third largest market in the Eurozone after Germany and France,” says Galli. “Overall the local guys have reduced their activity, but it is all part of a chain - the Italian market is not a leader, we follow the UK and other markets - what happens in Italy is no different from there.
“As to the future, everything depends on the bigger market. If the people who invest come back, the global market will come back. There are lots of opportunities. BNP Paribas is the custodian for many of the major pension funds and they are not so involved in securities lending. If the market grows, it will help them enter the market.”
“It is difficult to say when the Italian market will pick up,” says Galli. “A bull market will help the recovery here as in all financial markets. Not everyone understands that but we do.”
This has, however come from the domestic market; the international institutions are still wary of getting their fingers burnt, and until the rest of the Eurozone countries start to make a mark, Italy’s growth will be restricted.
“The market has survived,” says Stefano Galli, part of the securities lending team at BNP Paribas in Milan. “It has survived like any other continental European market. The size has been reduced by what happened in the last two years, but we have seen some recovery this year. It’s been quiet again since mid-June, but I believe that’s simply because it’s summer and the market is never at its busiest at this time of year.”
Italy has traditionally been the third biggest market for securities lending within the Eurozone. All the major international banks have a presence in the market, which is bolstered by some serious local players. But with a heavy stock market focus on financial companies, it was in the eye of the storm during the downturn.
“The main index in Italy is mostly composed of financial stocks, which is much higher than in Germany and France,” says Galli. “And that means that the intervention of the regulators was much more important as they were the stocks attacked by speculators. But now, the regulators are working with others across Europe - they do understand and appreciate the importance of short selling and securities
lending.”
The regulators had to step in - in 2008 and 2009 short selling bans were put in place to keep the markets afloat, which led to some of the major international players withdrawing from securities lending activities as they searched for safer havens elsewhere in Europe.
“The derivatives market has picked up compared to 2008 and 2009, so we are seeing some activity there,” says Galli. “The recovery will be in part driven by the hedging of derivatives. Cash is interesting but it’s not the driver it once was.”
“We were badly hit by the short selling ban in 2008-09, and it took some people out of the market,” says Galli. “But now, if there is a spread, people will come back to the market. At the moment, there is not and it is difficult to make money.”
“We have lost a couple of broker-dealers, and this is a shame for us as we had good business relations with them - they were good borrowers of stocks. Otherwise the same people are trading as were a couple of years ago - proprietary traders and derivatives specialists. It’s not that there are that many fewer people in the market, it’s that they are carrying out less trading and looking at less risky trades.”
The Italian regulators have stopped taking initiatives on their own - they are looking to see what the EU is going to do.”
“The problem was that no-one knew what was going to happen,” says one broker-dealer, “The regulators in Italy were caught on the hop, I think, and it was difficult to make investment decisions when we didn’t have the confidence that those decisions wouldn’t be affected by events outside our control. But the situation has improved - the message now is that any new rules that come in will be the same for the whole of Europe, and they won’t be making quick decisions just for Italy.”
Although nothing has yet been decided, the new regulations coming out of the EU are not expected to include any serious restrictions that would affect the securities lending market. The recent stress testing of many of the region’s major banks has indicated that the vast majority are financially sound, and can continue to offer the same services as in the past - although the possibility of sovereign default was not considered.
As far as the drivers of the market are concerned, Italy doesn’t have the huge hedge funds seen in other parts of the world. However, there remains plenty of untapped opportunity.
“70 per cent of the demand for Italian stocks came from abroad, which makes us the third largest market in the Eurozone after Germany and France,” says Galli. “Overall the local guys have reduced their activity, but it is all part of a chain - the Italian market is not a leader, we follow the UK and other markets - what happens in Italy is no different from there.
“As to the future, everything depends on the bigger market. If the people who invest come back, the global market will come back. There are lots of opportunities. BNP Paribas is the custodian for many of the major pension funds and they are not so involved in securities lending. If the market grows, it will help them enter the market.”
“It is difficult to say when the Italian market will pick up,” says Galli. “A bull market will help the recovery here as in all financial markets. Not everyone understands that but we do.”
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