Deutsche Börse speaks to BNY Mellon and PGGM as users of its securities lending central counterparty to discuss its benefits and industry trends
As committed clients to Eurex Clearing, can you describe the key business drivers that influenced your decision to use Eurex Clearing services?
James Day, BNY Mellon: There are a number of different drivers from clients to use the central counterparty (CCP), and they differ depending on the client type and the jurisdiction of that client. For the insurance sector, they have identified the capital benefits under Solvency II when facing the CCP.
With the continued focus on capital efficiencies across the industry, clients resident in a jurisdiction with unfavourable netting opinions is finding it more challenging for borrowers to face them, especially in the general collateral space. Clients executing lending transactions via the CCP are seeing increased borrowing demand for their assets due to the 2 percent capital weighting when facing the CCP, and the increased opportunities for balance sheet netting.
Clients are viewing the CCP as an additional distribution channel to borrowers if they should reach their internal risk limits. They can continue to arrange loans to the borrowers—and give the loans up for clearing with the CCP—utilising their risk limit with
the CCP.
Roelof van der Struik, PGGM: We see the potential of the CCP model but assess all the offerings on their individual merits. In general, the free market economy means that companies shy away from products they deem as not good enough and then buy those they like. PGGM sees Eurex Clearing as the most important innovation in securities lending of the past years. This innovative product needs the backing of committed market parties to make it the success it deserves. PGGM is committed to being one of these parties. For PGGM, the Eurex cleared lending route complements the current lending routes to market and therefore immediately adds value.
What due diligence has your organisation undertaken to enable the implementation of central clearing into your business model?
Day: Clients contract with Eurex Clearing to become a specific lender license holder (SLLH). By becoming an SLLH, they agree and accept the clearing terms and conditions of Eurex Clearing that pertain to securities lending activities. As a result, clients’ legal and risk teams are fully engaged and are carefully and thoroughly reviewing the clearing terms and conditions to ensure they fully understand all of the rules and nuances associated with the CCP model.
van der Struik: We have followed the Eurex cleared securities lending initiative for several years but had some reservation which left us sitting on the fence. A year and a half ago, triggered by the involvement of Morgan Stanley, we revisited the offering in earnest and decided to see if we could make a working business case. This business case then fitted nicely into a larger project within PGGM called ‘collateral roadmap’. The rest, as they say, is history.
Where do you see an opportunity for more effective pricing and revenue for your business and your clients by using the CCP?
van der Struik: In the short term, operational and balance sheet efficiency should translate into higher earnings for the whole value chain. In the long term, netting over the different products could further enhance revenues.
Day: As discussed earlier, capital efficiencies across the industry are in focus. Clients lending via the CCP are seeing a pricing premium from borrowers for providing them with capital efficiency.
Clients are able to increase their capacity to lend via the CCP. Their risk departments are comfortable extending larger risk limits to the CCP than they are to individual borrowers, thereby increasing their ability to lend.
From an agent lender perspective, the CCP reduces the capital employed to support the transactions. Where clients are comfortable accepting the risk of the CCP and don’t require the agent lender default indemnification, there is no capital required. Where indemnification is required, it reduces the level of capital.
Have recent regulatory requirements influenced your decision to participate in a cleared solution for securities lending and repo?
Day: Regulatory factors have been a major force in shaping the securities financing industry over the last several years, which has resulted in changing behaviour among borrowers and lenders. Regulators have been clear about their wish to see more of the securities financing business move to a centrally cleared environment. Clients are aware of the changing environment in which they operate in, and are keen to remain relevant to borrowers and continue to generate revenue from their lending programmes. They are viewing the CCP as one of the tools to enable them to meet that objective.
van der Struik: It is not so much recent regulatory developments that triggered PGGM. In general, we see no harm in embracing good initiatives that have the backing of regulators. But again, first and foremost is that the product should be worth purchasing. It is in everybody’s interest to help build a robust securities financing transaction infrastructure and cleared solutions certainly play an important role in this.
What should CCPs focus on for the medium-long term so that they can assist the market further?
van der Struik: In the short to medium term it is important that the universe of eligible assets (countries) is increased. As mentioned before for the medium term netting over the different products could further enhance the offering. For ‘any’ term we hope that all the CCP initiatives help break down the silos and bring back liquidity to the securities finance market.
Day: The major benefit of transacting through the CCP comes with the economies of a scale. From a borrower perspective, providing netting benefits from their securities lending, repo, derivatives and cash businesses through the CCP improves their efficiency, which will increase demand for centrally cleared transactions. This, in turn, should result in pricing improvements for clients lending via the CCP and the re-investment of the cash collateral via the repo CCP. It should also simplify the documentation and onboarding process to make it easier for clients to sign up to the CCP.
