Advent of CCPs "arouse a passion" in asset managers - Finadium
05 September 2011 London
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Emergence of CCPs is among the most controversial developments in the securities lending markets, according to the 2011 Finadium survey of Leading Asset Managers on Securities Lending, Collateral Management and Custody.
Central Credit Counterparties (CCPs) take what was once a bilateral trade and centralise the counterparty risk in one AAA-rated entity. CCPs do not, however, eliminate risk but rather mutualise it across a group of participating members, banks or broker-dealers.
"The topic of CCPs tends to arouse a passion in educated asset managers because of the change they represent, the level of control they take away from...decision-making and the potential impact on revenues," writes Josh Galper, managing principal at Finadium and author of the report.
"The risk offset of mitigating counterparty default does not appear to make up for what could be lost; this is a change from last year when managers appeared to be more positive about the potential of CCPs," he adds.
The survey found that most managers, at 57 per cent, prefer their current bilateral counterparties while 17 per cent are indifferent to whether they are exposed to bilateral or CCP credit risk. A minority of nine per cent prefers the CCP model while the last 17 per cent state they do not have enough information to express a clear desire either way.
CCPs are being boosted by a variety of global regulatory requirements coming into force to promote transparency. Basel III, for example, states that any transactions cleared via a CCP do not require any allocation of capital.
As it is early days, volumes in this space are still low. SecFinex, the first live centrally cleared multi-lateral trading facility (MTF) for the securities lending market in Asia, Europe and the US - estimates it has between $300 to 400 million on loan and $1.2 billion of liquidity on a daily basis. But the MTF, which works with LCH.Clearnet and Six-x clear for clearing services, is looking to treble or quadruple that over the next year as regulation drives trades onto exchanges.
In the Finadium survey, a North American securities lending manager commented: "Any time you introduce a new middleman there are more mouths to feed. While there is some risk mitigation with a CCP we prefer to manage that risk ourselves."
Central Credit Counterparties (CCPs) take what was once a bilateral trade and centralise the counterparty risk in one AAA-rated entity. CCPs do not, however, eliminate risk but rather mutualise it across a group of participating members, banks or broker-dealers.
"The topic of CCPs tends to arouse a passion in educated asset managers because of the change they represent, the level of control they take away from...decision-making and the potential impact on revenues," writes Josh Galper, managing principal at Finadium and author of the report.
"The risk offset of mitigating counterparty default does not appear to make up for what could be lost; this is a change from last year when managers appeared to be more positive about the potential of CCPs," he adds.
The survey found that most managers, at 57 per cent, prefer their current bilateral counterparties while 17 per cent are indifferent to whether they are exposed to bilateral or CCP credit risk. A minority of nine per cent prefers the CCP model while the last 17 per cent state they do not have enough information to express a clear desire either way.
CCPs are being boosted by a variety of global regulatory requirements coming into force to promote transparency. Basel III, for example, states that any transactions cleared via a CCP do not require any allocation of capital.
As it is early days, volumes in this space are still low. SecFinex, the first live centrally cleared multi-lateral trading facility (MTF) for the securities lending market in Asia, Europe and the US - estimates it has between $300 to 400 million on loan and $1.2 billion of liquidity on a daily basis. But the MTF, which works with LCH.Clearnet and Six-x clear for clearing services, is looking to treble or quadruple that over the next year as regulation drives trades onto exchanges.
In the Finadium survey, a North American securities lending manager commented: "Any time you introduce a new middleman there are more mouths to feed. While there is some risk mitigation with a CCP we prefer to manage that risk ourselves."
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