IMN: keeping securities lending fees-able
04 February 2016 Phoenix, Arizona
Image: Shutterstock
There was a significant swing in the percentage of US and Canadian transactions using non-cash collateral last year, according to DataLend’s Chris Benedict, who predicted that this might even reach a 50-50 split by the end of 2016.
Benedict, speaking at IMN's 22nd Annual Beneficial Owners' International Securities Lending & Collateral Management Conference in Arizona, went on to reveal that Asia had the highest percentage of its trade fees sitting between 20 and 50 basis points (bps), whereas Europe’s most common trade fees sat at 20 bps or below.
The conversation quickly turned to the future of indemnification following the discussion about fees, with David Martocci of Citi describing the practice of indemnifying the beneficial owner as the elephant in the room.
The panel agreed unanimously that indemnification, as it currently exists, is unsustainable and must change, given the pressure on spreads and increasingly onerous capital requirements.
“Going un-indemnified is a small but growing proportion of our clients,” shared Gino Timperio of State Street.
The growth of term trades was one example given as to why blanket indemnification, currently enjoyed by some beneficial owners, is becoming an unpractical service for agent lenders—the cost and risk versus the reward are bordering on unacceptable. “Not all trades are born equal,” summarised one panellist.
A snap poll of the audience found that 100 percent of the buy side in attendance would be willing to negotiate different cost levels to borrow securities based on the risk weighting of beneficial owners.
For beneficial owners in the room, 31.3 percent said they would be willing to lend without indemnification.
Martocci gave context to this figure, stating that if that question was posed even up until a year ago, he would expect the percentage willing to do so would be around 5 percent.
At the same time, however, only 38.9 percent of beneficial owners said they would be willing to adjust their fee splits to include an indemnification feature, suggesting there is a small group of beneficial owners who are not willing to lend without an indemnity but are also unwilling to negotiate less favourable fee splits to pay for the service.
Benedict, speaking at IMN's 22nd Annual Beneficial Owners' International Securities Lending & Collateral Management Conference in Arizona, went on to reveal that Asia had the highest percentage of its trade fees sitting between 20 and 50 basis points (bps), whereas Europe’s most common trade fees sat at 20 bps or below.
The conversation quickly turned to the future of indemnification following the discussion about fees, with David Martocci of Citi describing the practice of indemnifying the beneficial owner as the elephant in the room.
The panel agreed unanimously that indemnification, as it currently exists, is unsustainable and must change, given the pressure on spreads and increasingly onerous capital requirements.
“Going un-indemnified is a small but growing proportion of our clients,” shared Gino Timperio of State Street.
The growth of term trades was one example given as to why blanket indemnification, currently enjoyed by some beneficial owners, is becoming an unpractical service for agent lenders—the cost and risk versus the reward are bordering on unacceptable. “Not all trades are born equal,” summarised one panellist.
A snap poll of the audience found that 100 percent of the buy side in attendance would be willing to negotiate different cost levels to borrow securities based on the risk weighting of beneficial owners.
For beneficial owners in the room, 31.3 percent said they would be willing to lend without indemnification.
Martocci gave context to this figure, stating that if that question was posed even up until a year ago, he would expect the percentage willing to do so would be around 5 percent.
At the same time, however, only 38.9 percent of beneficial owners said they would be willing to adjust their fee splits to include an indemnification feature, suggesting there is a small group of beneficial owners who are not willing to lend without an indemnity but are also unwilling to negotiate less favourable fee splits to pay for the service.
NO FEE, NO RISK
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