Upcoming regulation remains a key focus for market participants as firms struggle to solve for Basel III Endgame binding constraints, and as repo markets are set to face the inbound US Treasury clearing mandate.
Industry leaders came together for the ‘Leaders’ Perspectives & Predictions’ session at the International Securities Lending Association’s (ISLA) 31st Annual Securities Finance & Collateral Management Conference.
With increasingly complex interdependencies between industry participants across the end-to-end securities finance value chain, coupled with greater capital requirements, scarcity of resources and increasing costs of doing business, market experts shared their insights on the current landscape.
Discussing what is driving lending demand, the panel said that ability to manage binding constraints, both internally and externally, in terms of Basel III Endgame, has become an increasing proportion of their day-to-day, and demand from a prime brokerage perspective.
Broadly speaking, they noted that this has impacted the securities lending business negatively in some ways, with one panellist citing European balances on loan as a notable example.
Considering synthetic versus physical short selling, a shift to the former in Europe was highlighted by the panel. The capital efficient nature of synthetic shorting was a key consideration, one speaker said, while the way the market is positioned at the moment, traditional financing rates are at all time highs, and so synthetic activity is a real economic way to cover shorts.
According to the speakers, the peer-topeer model has grown more in the repo space than in the lending space as of late. The repo market was heavily discussed in the session, with upcoming regulation driving the debate.
Mandatory clearing in the US Treasury space is set to impact repo markets. John Templeton, managing director, global head of securities finance sales and relationship management at BNY, said it has been interesting to watch the client engagement around this space. Prior to the mandate, there was already a substantial portion of the market that was cleared.
The final rule on US Treasury clearing was adopted by the US Securities and Exchange Commission (SEC) in December 2023, and is scheduled to come into effect in December 2025 for cash transactions, and June 2026 for repo transactions.
Templeton indicated that while the deadline seems a long time away, he urged everyone to start looking at the document now and get prepared. From a documentation perspective, he highlighted that it takes time for market participants to “get used to the idea” that they will not only need to negotiate their repo agreement, but they will need to abide by and accept the new Fixed Income Clearing Corporation (FICC) rule book.
Coming to a conclusion, the panel provided their final thoughts on “what’s next”. Solving the issue of binding constraints was key for one market participant, while another highlighted their focus on the Middle East, which could be a significant revenue driver for some firms as the region gains traction across the global market.
