CCPs provide choice - SIX x-clear
22 September 2011 SIBOS Toronto
Image: Shutterstock
Amid a larger overhaul of opaque financial transactions associated with bilateral markets, CCPs are making the business case for their role in the securities lending industry.
SecFinex, an MTF for cleared securities lending transactions, has made some progress pulling business onto a platform, but there is still work to be done convincing agent lenders of the value proposition, says Tomas Kindler, head of clearing relations at Six Securities Services on the sidelines of the Sibos conference in Toronto.
Drawing a parallel to the OTC derivatives market, Kindler says that though regulations such as Basel III favour cleared transactions, they are not the key component of the industry’s business models, which are emerging to meet the anticipated demand.
On a cautionary note, he adds that, like OTC derivatives markets, securities lending markets are undercollateralised.
“With a CCP in place, that becomes very transparent, you can’t undercollateralise anymore, there are very strict requirements in terms of risk exposure and that is part of the risk mitigation that comes with a CCP,” Kindler says.
Moreover, since CCPs behave as a counterparty, the risk profile of existing counterparties is made irrelevant, he adds.
“We are a AA-rated entity and from our perspective we create choice, [market participants] do not need to worry anymore about who they are dealing with because the CCP steps in and [the trading] is anonymous,” Kindler said.
The issue being debated within the industry, however, is over the potential repercussions of a CCP default.
Kindler believes that expected requirements to be set by IOSCO, a membership organisation of securities regulators, will go far in ensuring robust risk management and supervision. In SIX x-clear’s case, the Swiss regulator currently demands stress testing in adverse scenarios, such as the default of a CCP’s two biggest clients.
However, he acknowledges that more options might be needed in order to bring agent lenders onside.
“Maybe there is a need…to have two offerings to the market…a bilateral offering and a centrally cleared offering at different price levels with a different risk profile associated with each,” he says.
SecFinex, an MTF for cleared securities lending transactions, has made some progress pulling business onto a platform, but there is still work to be done convincing agent lenders of the value proposition, says Tomas Kindler, head of clearing relations at Six Securities Services on the sidelines of the Sibos conference in Toronto.
Drawing a parallel to the OTC derivatives market, Kindler says that though regulations such as Basel III favour cleared transactions, they are not the key component of the industry’s business models, which are emerging to meet the anticipated demand.
On a cautionary note, he adds that, like OTC derivatives markets, securities lending markets are undercollateralised.
“With a CCP in place, that becomes very transparent, you can’t undercollateralise anymore, there are very strict requirements in terms of risk exposure and that is part of the risk mitigation that comes with a CCP,” Kindler says.
Moreover, since CCPs behave as a counterparty, the risk profile of existing counterparties is made irrelevant, he adds.
“We are a AA-rated entity and from our perspective we create choice, [market participants] do not need to worry anymore about who they are dealing with because the CCP steps in and [the trading] is anonymous,” Kindler said.
The issue being debated within the industry, however, is over the potential repercussions of a CCP default.
Kindler believes that expected requirements to be set by IOSCO, a membership organisation of securities regulators, will go far in ensuring robust risk management and supervision. In SIX x-clear’s case, the Swiss regulator currently demands stress testing in adverse scenarios, such as the default of a CCP’s two biggest clients.
However, he acknowledges that more options might be needed in order to bring agent lenders onside.
“Maybe there is a need…to have two offerings to the market…a bilateral offering and a centrally cleared offering at different price levels with a different risk profile associated with each,” he says.
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