SLT: Allen, you have been with SecFinex since day one. How would you describe the past 10 years?
Allen: Interesting! We were the first to provide traders with an electronic trading system. The lenders were very keen right from the start, not really surprising as we provided a central portal where they could show availability to all their borrowers, so a more efficient way to distribute. The biggest challenge was getting traders off the telephone and using the screens, especially on our anonymous market, but per- severance paid off and for some it became part of their daily routine. Now of course electronic trading is an accepted way of doing business.
SLT: With regulators pushing for more and more transparency does this mean the time has now come for SecFinex?
Allen: Change in the securities indus- try rarely happens overnight. The gradual migra- tion of securities lending into a market and CCP structure has been on the industry’s agenda for several years, but there was no impetus to drive it forward. What the increased focus on trans- parency does is help accelerate the process, and yes SecFinex is well positioned.
SLT: As a strong advocate for CCPs have you seen a greater ap- petite for information, membership and overall business since we first spoke for Issue 2 in June?
Allen: Absolutely. We are currently engaging with a number of agent lenders, hold- ing detailed workshops with them. The recent paper published by Roy Zimmerhansl and Andy Howieson generated further interest from the market and resulted in requests for information. We have a major GCM working towards provid- ing their services in Q1 2011 and we are having detailed discussions with two others.
SLT: A number of people at the ISLA Conference earlier this year voiced the view that the only way the market will take to CCPs will be with a mixture of carrot and stick. What are your thoughts on this?
Allen: I understand the sentiment but I do not believe that this is the full picture. The real driver for market and CCP structures is enlight-
ened self interest. While such structures will in- deed mean some changes in the way business is done, they will also allow the expansion of the market without run-away risk. As such I believe that the financial returns for both borrowers and lenders will be increased in a CCP world All that is necessary is a clear understanding of a cen- trally cleared marketplace proposition.
SLT: Will the expected increasing usage of CCPs mean more com- petition from new entrants to the market?
Allen: I would be shocked if SecFinex remained as the sole MTF for stock lending for more than a year or so. Product diversity is one of the major elements of competition between exchanges and MTFs and so it is inevitable that other stock lending markets will emerge. We at SecFinex have always maintained that such a move would enhance our business and we are happy to back our products against any that might emerge. That no other market has yet been launched in Europe is more of a testimony to the complexity of the stock lending world rath- er than a comment on the desirability of such markets.
SLT: There have been criticisms that the increased capital require- ments of Basel III are too harsh. How do you feel about this?
Allen: I think that there is a legitimate concern in the market that the increase in the common stock element of capital under Basel III may create considerable difficulties – especially in the short term as banks scramble to tap the capital markets. However it may be the liquid- ity requirements, which are still to be finalised, that will have the greatest market impact. There is little doubt in my mind that one effect of re- cent CRD changes and the forthcoming Basel III changes will be to force a large proportion of business which is currently done OTC into CCP structures. Many CCPs are not yet geared up to take on the challenge of clearing multiple OTC instruments and are likely to struggle in some areas, but as SecFinex is already positioned with a CCP backed product, stock lending can be among the first major OTC markets to move to CCP under the new regulatory regime.
SLT: Do you see any European markets closing in on London as the continent’s financial capital, particularly within the securities lending industry?
Allen: Not really, no. I think it’s more a case of the UK not making it uncompetitive to do business here through taxation or regulation; it’s ours to lose so let’s hope that doesn’t happen.
SLT: There has been a lack of demand from hedge funds in 2010, the market has been relatively flat, so where do you see the industry heading in 2011 and what are the future plans for SecFinex?
Allen: The general consensus at re- cent industry events is that it will be a very long time before we get back to the levels we saw two years ago, if ever. It is my personal belief that for this market to grow at all, it needs to embrace a CCP model. The post Lehman world is focused on counterparty risk as we can see from the forthcoming, CRD changes, Basel III capital requirements and Solvency 2 implemen- tation. Additionally regulators are determined to reduce the opacity and bi-lateral risk of OTC markets, as can be seen from the impending EMIR legislation. Together these changes are converging to create a ‘perfect storm’ which will drive market participants to a CCP solution.
At SecFinex our focus remains on Europe. We will continue to build up participation in the CCP model and further develop the product func- tionality based on market feedback. We have already received some useful comments about product build out which we are considering in- corporating during 2011. We are also planning to launch the UK market with SIX x-clear as the central clearer, so we certainly will not be idle.
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