OCC’s Joseph Pellegrini reflects on 2014, and reveals what the central counterparty is looking to bring to market in the future
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How successful was OCC’s 2014 for securities lending?
Our programmes have been very successful. Securities lending business done via OCC has been terrific, with volumes increasing and notional values skyrocketing. We have more members doing more transactions than ever—they’re all looking to a central counterparty (CCP) as a possible solution for regulations that are in the pipeline.
We’re also getting a lot of feedback from our broker-dealer members, so we’re looking forward to 2015 and ways we can enhance our securities lending service.
Why is OCC bringing agent lenders into the fold?
Agent lenders are the prime source of liquidity. We have a big portion of broker-dealer business but it’s probably a small part of an industry in which the agent lender is king. We need more liquidity in the programme to make it grow, so that’s why we want to get them in.
We’re looking at a two-phase solution for agent lenders. The first is to bring banks in as full clearing members. In that capacity they would pay margin and contribute to the clearing fund, just like our broker-dealer members. While this is a quick and easy enhancement to our programme, we understand that it does not solve the majority of issues for agent lenders.
The second phase will be much more like the traditional agent lender model, so that they can come in and do business the way they do it today. This is a longer-term project, as it’s a little more difficult for us in terms of legal and structural work. This phase will hopefully be what agent lenders need to play ball with us.
Is this something that will appeal to regulators?
We think so. We are talking to regulators, particularly the Securities and Exchange Commission, and they like the idea of seeing a CCP used for some part of the securities lending business. Of course, this isn’t mandated, but some regulations favour using a CCP, while others might offer exemptions down the road. We think that some of the regulations in the pipeline are pushing agent lenders towards the CCP solution, and we’re here to help with that.
What about beneficial owners?
Beneficial owners are still unclear as to how they can face a CCP without diverging from the traditional agent lender model. Current practice sees them facing an agent lender or broker-dealer, and the CCP model is still evolving in the US.
Education is the key to addressing this. Beneficial owners need to be made comfortable with CCPs to the point that they understand that facing a CPP can be beneficial.
How are they reacting to CCPs? Do they want to become more comfortable with them?
Beneficial owners are learning more about CCPs as regulations change the way that securities lending is done. The pressure that they are putting on indemnification is one reason for this. Beneficial owners are asking more questions and it’s clear that they want to increase their knowledge and understanding. Agent lenders need to take the lead on this, but OCC is here to help.
What can we expect from OCC next year in terms of new products?
We’re putting the finishing touches on the work that we need to do for an AQS Equity Repo product. The proof of concept is done and we’re in the process of finalising the rules around the transaction. We expect that to come to market in 2015.
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