At every securities lending forum, the industry considers the issues surrounding CCPs. There is no doubt that acceptance is forthcoming - the Bank of England’s Securities Lending and Repo Committee (SLRC) recently considered inviting representatives of CCPs to meetings. But there are big question marks over competing models. The committee identified three hurdles for CCPs: conceptual issues such as the purpose, construction and scope of the offering, product design and practical issues for implementation.
SIX x-clear, the CCP of SIX Securities Services, had a relationship with SecFinex, the securities lending trading platform majority owned by NYSE Euronext. Just hours after SLT caught up with Tomas Kindler, head of clearing relations at SIX Securities Services, NYSE announced that SecFinex was closing its doors in an admission of the difficulties CCPs face gaining traction in the market.
But even before the announcement, Kindler noted that the trading platform had negligible market share. Speaking on the sidelines of the Global Custody Forum, here is his take on the advent of CCPs in the securities lending space
SLT: What is the situation right now for CCPs in the securities lending industry?
Tomas KindlerTo a large extent it is still a bilateral market that is cleared bilaterally, I don’t know the market share of the trading venues that are out there but it is clearly below 10 per cent…so at the moment it is linked to trading venues. When I look at the regulation, the main focus is on OTC derivatives, but the Bank for International Settlements (BIS) has recently conducted a market consultation on capitalisation of bank exposures to central counterparties. For the BIS, OTC derivatives, securities lending and repo are all one mass and they apply the same framework to all three asset classes. That is particularly relevant when we look at capital requirements. If you clear against a qualified CCP, it is two per cent capital underlying, if it is not CCP cleared, it is at least 20 per cent if your counterparty is a bank, or as much as 100 per cent if it is not a bank. So even though there might not be the regulatory push that we see in the OTC derivatives space, from a capital requirements perspective this is creating a strong incentive with the securities lending market to use CCP clearing.
One of the key questions is how can CCP clearing be introduced for the OTC securities lending market?
SLT: How can CCPs overcome some of the difficulties they face in gaining market acceptance?
Kindler: I think the lower capital requirements will certainly help, but bottom line is the market has to be ready to pay for risk mitigation and I think some market participants are ready to do that and others might not be ready because it might impact on some of the commercial models, particularly when it comes to agency lending. The fee splits can’t support additional costs for collateral, so that might have to change and maybe there will be two products in the future, one for the CCP clearing and one for bilateral.
One key element is when you look at the membership criteria of CCPs. Many market participants do not qualify as direct CCP members because they are not regulated banks or brokers or they might not fulfil the capital requirements - by definition they have to go through an intermediary, a general clearing member. One of the points raised by the BIS is, how can these market participants, while going through an intermediary, benefit from the lower capital requirement of CCP clearing?
And what they recommend is that, given there is an appropriate level of segregation on the beneficial owner level in the CCP, when it comes to margin, collateral and assets, the lower capital requirements could also apply to indirect clearing members. I think that is an important element going forward to make CCP clearing more attractive in that space.
SLT: Of the competing models, Eurex seems to be addressing the bilateral relationship most, what is the industry response?
Kindler: It is an OTC model, so I think they have understood the requirements. As I understand it, one element is a special clearing licence for long only lenders so they don’t have to provide margin collateral. What they are trying to do is to replicate the current OTC model in a CCP, and I guess we need to see how the final solution and offering will look like. But for the time being, what I am hearing in the market is that there are a couple of question marks around that model, at the same time it addresses OTC
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