It’s quiet—almost too quiet
20 October 2015
The regulatory overhaul of securities lending and the possible role of central counterparties dominated this year’s RMA conference in Miami
Image: Shutterstock
Those hoping that a regime change in the US after the presidential election will save their business from the oppression of Basel III are out of luck, heard attendees at the 32nd Risk Management Association (RMA) Securities Lending Conference in Miami.
Gregory Lyons, partner at Debevoise & Plimpton, explained that the current terms of Basel III are here to stay, as they’re implemented through regulatory, not legislative action.
The first session of the conference analysed the current regulatory landscape and looked back at how far the securities lending industry has come since the RMA conference last year.
“It’s been a relatively quiet summer, too quiet some might say,” said Lyons.
Q4 2015 and Q1 2016 will likely revive the tempo of industry change as all major regulatory bodies are expected to make major announcements concerning their vision for the next 18 months at the G20 summit, which begins on 15 November.
“It’s going to be a busy Christmas and New Years for all of us,” added Lyons.
The US Securities and Exchange Commission, the Basel Committee, the Financial Stability Board and the International Swaps and Derivatives Association (ISDA) are all expected to use the occasion to deliver further details on issues such as the so-called ‘Basel IV’ initiative, the ISDA stay protocol and total-loss absorption capacity.
‘Basel IV’ is the unofficial title given to plans to tackle the variables that currently exist in the way different states in Europe and the US interpret some aspects of regulation. The aim is to close any potential loopholes that allow international companies to exploit the rules to get better treatment by the regulator by shifting assets to different regions.
After outlining the numerous regulatory hurdles being tackled presently or on the horizon, the point was raised that with all the new regulatory proposals being put forward, very little time had been given to reviewing how all these new restrictions would work in tandem, and their combined impact on the market.
With the development phase of most of these new rules now complete, there’s a need to do just that as it recently emerged that European repo activity had dropped significantly in 2015 and is stagnating under the weight of the new regulations.
The Bank of England, as one panellist pointed out, has since commissioned a study into whether the financial markets, although technically more stable, are actually being crippled by the new framework and whether a compromise needs to be reached.
Although this will be positive news for many, another panellist quickly reminded the audience that “US regulators disagree entirely and are showing no sign of slowing down on their efforts”.
All conversations of regulation ultimately led back to Basel III as the panel gave an update on the progress of the implementation of the liquidity coverage ratio and the net stable funding ratio (NSFR). The panel aligned itself with the majority of the industry’s belief when it was prediction that the NSFR, although not due to go live until 2018, would become a regular feature of the industry much sooner as the market would force banks to adopt the ratio as best practice long before the due date.
Another conference speaker turned to the burden of multiple variables in risk weighted assets calculations across different markets.
This trend can be clearly seen, explained the speaker, by the way European and Asian markets, which have much wider variables between independent countries than between states in the US, are much further along this path, although admittedly, there are other constraints on the US that are also slowing this shift.
The conversation then shifted to the ongoing and emotive subject of central counterparties (CCP) and their place in the world of securities lending.
With no CCPs on the panels, the debate was primarily from the agent lender and broker-dealer perspectives and most agreed that there was a place for CCPs as a ‘tool in the toolbox’, but too many questions marks remained to make concrete predictions for the future.
Agent lenders will become clearer about their inability, or unwillingness, to indemnify all trades. Whether this will increase the attractiveness of CCPs as an alternative risk mitigation tool remains to be seen, heard conference attendees.
The second day of the conference opened with a rigorous analysis of how the bond market will cope in the event of an interest rate hike.
“The thing that is on everyone’s mind is what will happen when the Federal Reserve starts tightening [interest rates],” commented one panellist.
“There will always be liquidity, it will just be at a greater price”, responded another. CCPs were recommended as a solution to how direct repo transactions could operate as another source of liquidity.
“In the current world we live in, a CCP is the solution,” observed a speaker. “But to get it right it needs to be all encompassing.”
Another panellist agreed and suggested that it would be crucial for any CCP solution to tackle the problems that were at the core of the 2008 crash.
In the second panel, attendees learned that agent lenders have had to adapt to a world with less collateral available and less flexibility in dictating what their clients post. This has led to a shift away from high-quality liquid assets (HQLA) towards accepting equity as collateral.
The point was made that not all beneficial owners are equal, and neither are all borrowers. Beneficial owners are becoming increasingly picky about their collateral parameters and causing headaches for their agent lenders, which are struggling to marry up lenders and borrowers with similar strategies.
The majority of the panel, made up of agent lenders and broker-dealers, agreed that the securities and correct collateral did exist in the market, but “mobilising” it with all the restrictions
in place is one of the biggest challenges they face day-to-day.
The agent lending disclosure (ALD) went under the microscope in a roundtable on market transparency.
A work group has been set up to create a two-way dialogue between regulators and the industry to improve the quality of reporting data from the market.
A pilot reporting programmee has since been created by the US Treasury and templates have been sent to select participants to test the new minimum standards for reporting. The aim is to tackle issues around the inconstancies and inefficiencies in the current data being reported to regulators.
The ALD work group will submit a new set of minimum standards that individual states can then choose to build upon or maintain.
Although the project is moving forward, some concerns have been raised that most financial institutions don’t have the technology to provide the level or format of data being requested.
The US focused work group is engaging with members of the European Central Bank to try and minimise the reporting burden for international firms that will have to report data in separate styles to each of the relevant regulators.
“ALD groups are going to be very busy over the next two years,” predicted one panellist.
Harold Ford Jr, five time Democrat congressmen for Tennessee, was the keynote speaker for this year’s conference. He gave a knowledgeable overview of the US political landscape in the lead up to next year’s election.
Ford also offered his perspective of dealing with the wider financial markets from the point of view of the government itself.
In keeping with the theme of shifting perspectives the next panel looked at the very topical issue of China and the Asian securities lending markets.
A summary offered by one panellist highlighted that the summer’s market turmoil had caused a decrease in borrowing and that there was a serious lack of appropriate collateral.
When discussing the impact of the Shanghai-Hong Kong Stock Connect on the securities lending industry, one speaker commented: “It will take years before we see more activity and it will take a long time for investors to get comfortable with the product.”
“There’s education that needs to be done and it will take time.”
Another speaker replied: “I’m bullish in terms of the future.”
As China begins to open itself up to outside investors, some concerns were raised about how the influence of Hong Kong, as the gateway to China, will be affected.
As one panelist put it: “The problem is there is no benefit currently with regard to Hong Kong for securities lending and borrowing, or the Stock Connect, because the assets are not held with the participants.”
The final panel of the event included leaders from across the industry who gave their analysis of the past year and looked forward to what the major talking points would be in the future.
“Securities financing is essential for the functionality of all the other markets around our industry,” argued Thomas Wipf, managing director at Morgan Stanley.
Overall, it was agreed that 2015 had been a good year for the securities lending industry and with many of the final details of the new regulations becoming clearer, industry players are able to get on with the job of implementation and expanding their businesses.
“People are more positive this year,” commented one industry leader. “Last year people were still creating their strategy but this year people know what they’re doing.” SLT
Gregory Lyons, partner at Debevoise & Plimpton, explained that the current terms of Basel III are here to stay, as they’re implemented through regulatory, not legislative action.
The first session of the conference analysed the current regulatory landscape and looked back at how far the securities lending industry has come since the RMA conference last year.
“It’s been a relatively quiet summer, too quiet some might say,” said Lyons.
Q4 2015 and Q1 2016 will likely revive the tempo of industry change as all major regulatory bodies are expected to make major announcements concerning their vision for the next 18 months at the G20 summit, which begins on 15 November.
“It’s going to be a busy Christmas and New Years for all of us,” added Lyons.
The US Securities and Exchange Commission, the Basel Committee, the Financial Stability Board and the International Swaps and Derivatives Association (ISDA) are all expected to use the occasion to deliver further details on issues such as the so-called ‘Basel IV’ initiative, the ISDA stay protocol and total-loss absorption capacity.
‘Basel IV’ is the unofficial title given to plans to tackle the variables that currently exist in the way different states in Europe and the US interpret some aspects of regulation. The aim is to close any potential loopholes that allow international companies to exploit the rules to get better treatment by the regulator by shifting assets to different regions.
After outlining the numerous regulatory hurdles being tackled presently or on the horizon, the point was raised that with all the new regulatory proposals being put forward, very little time had been given to reviewing how all these new restrictions would work in tandem, and their combined impact on the market.
With the development phase of most of these new rules now complete, there’s a need to do just that as it recently emerged that European repo activity had dropped significantly in 2015 and is stagnating under the weight of the new regulations.
The Bank of England, as one panellist pointed out, has since commissioned a study into whether the financial markets, although technically more stable, are actually being crippled by the new framework and whether a compromise needs to be reached.
Although this will be positive news for many, another panellist quickly reminded the audience that “US regulators disagree entirely and are showing no sign of slowing down on their efforts”.
All conversations of regulation ultimately led back to Basel III as the panel gave an update on the progress of the implementation of the liquidity coverage ratio and the net stable funding ratio (NSFR). The panel aligned itself with the majority of the industry’s belief when it was prediction that the NSFR, although not due to go live until 2018, would become a regular feature of the industry much sooner as the market would force banks to adopt the ratio as best practice long before the due date.
Another conference speaker turned to the burden of multiple variables in risk weighted assets calculations across different markets.
This trend can be clearly seen, explained the speaker, by the way European and Asian markets, which have much wider variables between independent countries than between states in the US, are much further along this path, although admittedly, there are other constraints on the US that are also slowing this shift.
The conversation then shifted to the ongoing and emotive subject of central counterparties (CCP) and their place in the world of securities lending.
With no CCPs on the panels, the debate was primarily from the agent lender and broker-dealer perspectives and most agreed that there was a place for CCPs as a ‘tool in the toolbox’, but too many questions marks remained to make concrete predictions for the future.
Agent lenders will become clearer about their inability, or unwillingness, to indemnify all trades. Whether this will increase the attractiveness of CCPs as an alternative risk mitigation tool remains to be seen, heard conference attendees.
The second day of the conference opened with a rigorous analysis of how the bond market will cope in the event of an interest rate hike.
“The thing that is on everyone’s mind is what will happen when the Federal Reserve starts tightening [interest rates],” commented one panellist.
“There will always be liquidity, it will just be at a greater price”, responded another. CCPs were recommended as a solution to how direct repo transactions could operate as another source of liquidity.
“In the current world we live in, a CCP is the solution,” observed a speaker. “But to get it right it needs to be all encompassing.”
Another panellist agreed and suggested that it would be crucial for any CCP solution to tackle the problems that were at the core of the 2008 crash.
In the second panel, attendees learned that agent lenders have had to adapt to a world with less collateral available and less flexibility in dictating what their clients post. This has led to a shift away from high-quality liquid assets (HQLA) towards accepting equity as collateral.
The point was made that not all beneficial owners are equal, and neither are all borrowers. Beneficial owners are becoming increasingly picky about their collateral parameters and causing headaches for their agent lenders, which are struggling to marry up lenders and borrowers with similar strategies.
The majority of the panel, made up of agent lenders and broker-dealers, agreed that the securities and correct collateral did exist in the market, but “mobilising” it with all the restrictions
in place is one of the biggest challenges they face day-to-day.
The agent lending disclosure (ALD) went under the microscope in a roundtable on market transparency.
A work group has been set up to create a two-way dialogue between regulators and the industry to improve the quality of reporting data from the market.
A pilot reporting programmee has since been created by the US Treasury and templates have been sent to select participants to test the new minimum standards for reporting. The aim is to tackle issues around the inconstancies and inefficiencies in the current data being reported to regulators.
The ALD work group will submit a new set of minimum standards that individual states can then choose to build upon or maintain.
Although the project is moving forward, some concerns have been raised that most financial institutions don’t have the technology to provide the level or format of data being requested.
The US focused work group is engaging with members of the European Central Bank to try and minimise the reporting burden for international firms that will have to report data in separate styles to each of the relevant regulators.
“ALD groups are going to be very busy over the next two years,” predicted one panellist.
Harold Ford Jr, five time Democrat congressmen for Tennessee, was the keynote speaker for this year’s conference. He gave a knowledgeable overview of the US political landscape in the lead up to next year’s election.
Ford also offered his perspective of dealing with the wider financial markets from the point of view of the government itself.
In keeping with the theme of shifting perspectives the next panel looked at the very topical issue of China and the Asian securities lending markets.
A summary offered by one panellist highlighted that the summer’s market turmoil had caused a decrease in borrowing and that there was a serious lack of appropriate collateral.
When discussing the impact of the Shanghai-Hong Kong Stock Connect on the securities lending industry, one speaker commented: “It will take years before we see more activity and it will take a long time for investors to get comfortable with the product.”
“There’s education that needs to be done and it will take time.”
Another speaker replied: “I’m bullish in terms of the future.”
As China begins to open itself up to outside investors, some concerns were raised about how the influence of Hong Kong, as the gateway to China, will be affected.
As one panelist put it: “The problem is there is no benefit currently with regard to Hong Kong for securities lending and borrowing, or the Stock Connect, because the assets are not held with the participants.”
The final panel of the event included leaders from across the industry who gave their analysis of the past year and looked forward to what the major talking points would be in the future.
“Securities financing is essential for the functionality of all the other markets around our industry,” argued Thomas Wipf, managing director at Morgan Stanley.
Overall, it was agreed that 2015 had been a good year for the securities lending industry and with many of the final details of the new regulations becoming clearer, industry players are able to get on with the job of implementation and expanding their businesses.
“People are more positive this year,” commented one industry leader. “Last year people were still creating their strategy but this year people know what they’re doing.” SLT
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