SLT: How has the attitude to risk within securities lending changed since the financial crisis?
Nick Bonn: It’s changed greatly. Although State Street fared relatively well during the crisis, we have taken a difficult different tack to collateral reinvestment. So despite our successes we are much shorter in duration and more sensitive to risk. It can affect our returns, but that’s because the credit risk is much more conservative.
Our non-cash programme, which was always more popular in Europe, has become more popular in the US - it doubled in 2010.
SLT: How has the US debt crisis
affected your business?
Bonn: [Prior to the announcement that agreement had been reached] we were having a meeting every three hours on the topic and talking to our clients, who were understandably nervous. I think State Street has done a great job holding on to clients during the crisis - they are still trading despite their aversion to risk and the lower returns but their confidence is very fragile and this has tested their will about staying in lending.
If treasuries are downgraded we can manage through that, but there will be industry wide liquidity issues. A default would have been the worst option - it would have changed the rules of the game.
A debt downgrade won’t change the opportunities we have, but it will add volatility and affect margins. We take AA paper now - we may be taking a lot more in the future...
SLT: Is securities lending now transparent enough?
Bonn: The agent securities lending market is transparent enough. The issue the regulators have is with naked short selling, and additional rules on disclosure for securities lending agents won’t help that. You’d have to get that information from prime brokers.
We publish our guidelines, holdings, returns and our reinvestment - all of it is transparent. But when it comes to naked short selling, it’s often a mystery about who is doing it and where it’s happening.
SLT: Are you seeing increasing numbers of beneficial owners coming to the securities lending market? Are existing participants increasing the amount of business they do?
Bonn: Until recently I would have said yes. We’ve hung on to our clients and our balances have remained stable, but nerves are fragile. We’re paying a lot of attention to the issues with the US debt market and we’re reaching out to our clients to ensure they are kept informed.
Half of my job is to reassure people. For example, some of our cash collateral is in European bank debt, our exposure hasn’t gone down, but we do our credit checks very carefully and we haven’t had any defaults - we ensure we are able to constantly reassure our clients.
SLT: How do you feel about CCPs?
Bonn: CCPs have an important role to play in the ever-developing securities lending industry and they may gain traction if they are legislated into existence. Currently, they tend to be a more expensive way of doing business and I’m not keen on the concept of sharing risk -especially in a market like securities lending where there aren’t many players.
SLT: How much of your time is now spent on regulatory issues? Are the regulators getting it right?
Bonn: We’re watching Basel III and the capital changes rules very closely. Even within big banks, capital is a commodity that is fought over. With Dodd Frank, the issue of credit concentration limits and how capital is calculated remains important. And when it comes to the transparency rules in securities lending, we’re hoping and working towards ensuring they are sensible and don’t just add up to a lot of work.
I believe that the regulatory requirements for providers could mean they become another barrier to entry for any firms considering involvement in securities lending.
SLT: What are you focusing on for the future?
Bonn: We have enough issues to focus on now! Sovereign debt is obviously going to be important, while regulation and how it changes the business we and our clients can do is taking up a lot of our time. We’re looking very hard at the risk/return concept and we are doing a lot of risk reporting.
I do believe that while returns are down, so is the level of risk. But the best way to keep our clients on board is to ensure our reporting is as comprehensive as possible.
The growth is there, it’s just taking a long time coming. We were expecting 2012 to be the year where the growth really took hold, but we’ve now revised that to 2013.
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