Greece
10 July 2012
Securities lending in Greece has taken a hit thanks to regulatory and economic uncertainty, as SLT finds out
Image: Shutterstock
The risk of recession in 2012, particularly in the eurozone, has forced governments to return to the drawing board again and again as they try to appease voters without damaging delicate and complicated financial markets. As governments try to understand financial practices such as securities lending—their advantages and disadvantages—rules that are aimed at strengthening financial systems and practices are being introduced and periodically reviewed.
In Greece, an “extraordinarily complex trading environment” has emerged, according to David Lewis, senior vice president at Astec Analytics, a SunGard capital markets business. He says that a combination of short selling bans, bailouts, repeated elections and the threat of a referendum on eurozone membership have led to the current trading environment.
Lewis adds: “Whilst the market has been open for securities lending for some years, the volatile nature of the economy has diminished its attractiveness.”
Short selling is one area of securities lending that has attracted significant interest from regulators and governments. Greece’s Hellenic Capital Market Commission (HCMC) implemented a ban on the covered and naked short selling of shares that are listed in the Athens Exchange in August 2011. HCMC planned to lift the ban in October, but then decided to extend it to December after talks with ESMA (the European Securities and Markets Authority) and the supervisory authorities of countries such as Italy and Spain, which also limited or prohibited short selling at the same time as Greece. After unsatisfactory conditions in the Greek capital market, HCMC extended the ban once again—this time to 25 July 2012.
In a statement that was released in August 2011, ESMA said: “[S]ome authorities have decided to impose or extend existing short-selling bans in their respective countries. They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets. These measures have been aligned as far as possible in the absence of a common EU legal framework in the area of short-selling and given the very different national legal bases on which such measures can be taken.”
Whether the aim of Greece’s short selling bans is to restrict the benefits of spreading false rumours or to achieve a level regulatory playing field, they have had a significant effect on securities lending in the country.
Lewis says: “Securities lending is a characteristic of an efficient market and lending should certainly be encouraged in any market to support market settlements as well as efficient price discovery. Greece is facing a multitude of structural issues at present and, even though all mature markets show that the mechanisms of securities lending and short selling positively affect their markets, political pressures in the Greek markets may well discourage active promotion of these facilities.”
Market makers and breakers
Short selling bans have affected borrowers’ demand for securities lending in Greece. “Demand is not huge; short selling bans have kept some investors at bay,” says Lewis. “But other risks and concerns have also kept others out. Individual securities continue to attract some interest when issues arise, such as the maturity dates of certain government bonds in the light of default fears.”
The fear of default is another factor that borrowers are considering when looking at their trading strategies in Greece. Lewis says: “Issuer risk is a greater concern for investors with the risk of default or an exit from the euro making trading economics complex to say the least.”
“Short sellers would factor such possibilities into their position taking, but there has not been a great deal of activity on this front as investors seek other opportunities.”
Issuer risk is a greater concern to borrowers than lenders, says Lewis. “As a lender, the beneficial owner will make their own investment decisions regarding the issuer risk of the securities they hold in their portfolios outside of any lending decisions they may make with regards to participation.”
“Borrowers look keenly at the issuer risk of the securities they borrow and along with that, closely monitor the value of the collateral that they provide to the lender. As a borrower is effectively downgrading their collateral, they will be monitoring the risk that collateral is exposed to very carefully.”
As a result of the political and economic difficulties that the country is facing, Greek securities have also “fallen out of favour with investors”, adds Lewis. “As a result there has been a drop off in the available supply of some securities being held in lending funds.”
Although short selling bans are in place and borrowers are concerned about issuer risk, securities lending business is being done in Greece. Citi’s securities finance business began offering agency lending services in the country in February 2010. In a statement released at the time, Citi said that adding Greece to its lending network would open up the country to “new sources of liquidity and support the development of ... local capital markets”. Citi declined a request to comment.
Lewis concludes: “Securities lending brings a positive impact to the liquidity of any market; without it spreads widen and costs for investors rise. Economic concerns and regulatory uncertainty have unfortunately affected the level of lending activity in Greece and as a result the market will have suffered, and will continue to do so.”
In Greece, an “extraordinarily complex trading environment” has emerged, according to David Lewis, senior vice president at Astec Analytics, a SunGard capital markets business. He says that a combination of short selling bans, bailouts, repeated elections and the threat of a referendum on eurozone membership have led to the current trading environment.
Lewis adds: “Whilst the market has been open for securities lending for some years, the volatile nature of the economy has diminished its attractiveness.”
Short selling is one area of securities lending that has attracted significant interest from regulators and governments. Greece’s Hellenic Capital Market Commission (HCMC) implemented a ban on the covered and naked short selling of shares that are listed in the Athens Exchange in August 2011. HCMC planned to lift the ban in October, but then decided to extend it to December after talks with ESMA (the European Securities and Markets Authority) and the supervisory authorities of countries such as Italy and Spain, which also limited or prohibited short selling at the same time as Greece. After unsatisfactory conditions in the Greek capital market, HCMC extended the ban once again—this time to 25 July 2012.
In a statement that was released in August 2011, ESMA said: “[S]ome authorities have decided to impose or extend existing short-selling bans in their respective countries. They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets. These measures have been aligned as far as possible in the absence of a common EU legal framework in the area of short-selling and given the very different national legal bases on which such measures can be taken.”
Whether the aim of Greece’s short selling bans is to restrict the benefits of spreading false rumours or to achieve a level regulatory playing field, they have had a significant effect on securities lending in the country.
Lewis says: “Securities lending is a characteristic of an efficient market and lending should certainly be encouraged in any market to support market settlements as well as efficient price discovery. Greece is facing a multitude of structural issues at present and, even though all mature markets show that the mechanisms of securities lending and short selling positively affect their markets, political pressures in the Greek markets may well discourage active promotion of these facilities.”
Market makers and breakers
Short selling bans have affected borrowers’ demand for securities lending in Greece. “Demand is not huge; short selling bans have kept some investors at bay,” says Lewis. “But other risks and concerns have also kept others out. Individual securities continue to attract some interest when issues arise, such as the maturity dates of certain government bonds in the light of default fears.”
The fear of default is another factor that borrowers are considering when looking at their trading strategies in Greece. Lewis says: “Issuer risk is a greater concern for investors with the risk of default or an exit from the euro making trading economics complex to say the least.”
“Short sellers would factor such possibilities into their position taking, but there has not been a great deal of activity on this front as investors seek other opportunities.”
Issuer risk is a greater concern to borrowers than lenders, says Lewis. “As a lender, the beneficial owner will make their own investment decisions regarding the issuer risk of the securities they hold in their portfolios outside of any lending decisions they may make with regards to participation.”
“Borrowers look keenly at the issuer risk of the securities they borrow and along with that, closely monitor the value of the collateral that they provide to the lender. As a borrower is effectively downgrading their collateral, they will be monitoring the risk that collateral is exposed to very carefully.”
As a result of the political and economic difficulties that the country is facing, Greek securities have also “fallen out of favour with investors”, adds Lewis. “As a result there has been a drop off in the available supply of some securities being held in lending funds.”
Although short selling bans are in place and borrowers are concerned about issuer risk, securities lending business is being done in Greece. Citi’s securities finance business began offering agency lending services in the country in February 2010. In a statement released at the time, Citi said that adding Greece to its lending network would open up the country to “new sources of liquidity and support the development of ... local capital markets”. Citi declined a request to comment.
Lewis concludes: “Securities lending brings a positive impact to the liquidity of any market; without it spreads widen and costs for investors rise. Economic concerns and regulatory uncertainty have unfortunately affected the level of lending activity in Greece and as a result the market will have suffered, and will continue to do so.”
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