James Day of BNY Mellon gives an agent lender’s perspective on the future of the securities finance market in Europe
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What are agent lenders doing to remain competitive, relevant and profitable in the future of the securities finance market?
In order for agent lenders to remain competitive, it is important that they fully understand the landscape and the challenges that clients, beneficial owners, and borrowers are facing, as well as the opportunities.
Clients may have a number of challenges, particularly with some of the regulations that are out there. We also have a lot of clients that are coming to us and looking at how they can solve for the non-cleared margin rules. Therefore, we are engaging with them and building our solution set accordingly.
We are constantly looking to introduce new assets into the programme that can enable our clients to generate additional revenue by meeting borrower demands.
From a yield perspective, it’s about optimising our current book and making sure that we are extracting the most revenue for our clients. We are also focused on market rates and making sure that we are keeping assets out on loan when rates are coming down.
Another area of focus is creating efficiencies that help clients extract revenue from their supply. There are a couple of new examples of market access and one of those is around central counterparties (CCPs) and pledge models. The other is the continued focus on automation amid an increasing pressure to do more with less. Real-time reconciliation of pending and settled loans is one example of how we are creating efficiencies across the whole lifecycle of the lending transaction.
How have new regulations impacted your business and what are you doing to alleviate these issues?
Regulation is driving opportunities across the marketplace. The introduction of the non-cleared margin rules, for example, is causing participants to look at securities lending and securities finance to meet their collateral and margining requirements.
Meanwhile, the Basel III capital, liquidity and balance sheet rules have created opportunities for beneficial owners to earn an increased premium for lending via these new structures. We have also seen evergreen term structures that address some of the liquidity issues where lenders are lending out their assets on term and they are generating a premium for doing so.
Another area that we are focusing on is accepting collateral under a pledge mechanism using an English law securities interest arrangement in a pool participant model. This is in order to enable our clients to participate and lend through a pledge of collateral to receive a premium on those loans.
We are also looking at CCP models to reduce the capital required to support borrowers and therefore give our clients the ability to earn a premium on the loan rate.
How are you adapting to offer fresh value-added services to existing and new beneficial owner clients?
The conversations that we are having with clients are really evolving as they look for various solutions to help them navigate the complexity out there. It’s all about helping clients unlock the liquidity that’s inherent within their portfolios, and extracting the intrinsic value from their assets for them.
The conversations that we are having with them are about how to transform their assets into an acceptable form of collateral: how they can raise cash from their assets, how they can invest any excess cash they have in their portfolios, and how they are hedging their currency exposure.
What can beneficial owners do to enhance revenue for both the buy- and sell-side?
They can increase flexibility for clients by introducing new assets into the programme and by investigating the use of CCPs and pledge models.
Capital liquidity and the balance sheet are in focus, so clients that have a flexible collateral profile will accept a broad range of assets and are able to generate and sustain the revenue of their assets.
As the constraints across the market change, it is that flexibility that will enable clients to meet the demands, depending on what the flexibilities are, and continue to earn revenue from their lending programmes.
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