Agency financing solutions: new ways of looking at funding and collateral
05 September 2023
Eileen Herlihy, global head of sales for trading services at J.P. Morgan, explains how their agency financing solutions team is helping clients to address a wide range of challenges, including alternative channels to access and deploy liquidity, self borrowing and support for client-directed transactions
Image: stock.adobe/SubScore
It was Winston Churchill who advised to “never waste a good crisis” and indeed, innovations and new ideas are often born as we grapple to learn from unexpected events. The finance industry is no different. Recent events such as health pandemics, geopolitical tensions and the gilt crisis demonstrated — to all participants in the financing and collateral ecosystem — the need for flexibility and resiliency when it comes to funding and mobilising assets.
At J.P. Morgan, we recognised the convergence of the finance and collateral landscape and, in 2016, we positioned our business to best serve our clients by combining our collateral services and agency lending businesses under the Trading Services banner. In addition to our traditional product offerings, we have structured a range of flexible solutions within our Agency Financing Solutions business to help clients with a myriad of challenges — for example generating and deploying liquidity, self-borrowing or supporting client-directed transactions.
All of these solutions interlink seamlessly with the wider securities lending function by leveraging documentation, operational processes, reporting suites and execution capabilities from the agency lending business. The client experience remains consistent across all of the different modules, so clients have a feeling of continuity underpinned by a strong risk and control framework.
Supporting sophisticated lenders
We see increasing sophistication from our asset owner clients who are looking for their agent lender to seamlessly facilitate client-directed lending transactions. J.P. Morgan acts in an administrative capacity to provide an array of post-execution trade services on transactions arranged by clients directly with their counterparties. The services cover all of the core lending functions, including collateral management, trade lifecycle servicing, recall and substitution processing, regulatory reporting, fees and billing.
Transactions can be executed utilising J.P. Morgan’s documentation or the client’s own legal agreements with the borrowing parties or collateral managers. J.P. Morgan can also provide liquidation services for transactions executed under J.P. Morgan documents.
Helping clients to raise and deploy cash
As the focus on cash increases in this rising interest rate environment, clients have asked us for alternative solutions to raise and deploy cash. The long and short cash products allow clients to access a broad range of counterparties and collateral types through the agency securities finance platform. While a significant number of clients may have the in-house capability to trade fixed income sovereign repo and reverse repo, this does not extend to a scalable solution for equity or corporate bond repo and they are looking to outsource execution of those trade types.
We saw significant interest in our short cash solution following the gilt crisis in the UK last year, as clients experienced a squeeze to raise liquidity for margin in a timely fashion. Clients that had sizable portfolios of equities — such as S&P500 — which were not eligible under their derivatives CSAs, utilised our short cash solution to transform such equities into cash to meet the value margin requirements under a CSA. Clients can raise liquidity in USD, EUR and GBP, with transactions structured to meet tenors from overnight to six months. We are able to arrange, execute and manage the transaction lifecycle, reducing the legal, operational and infrastructure burden on clients.
Through our long cash solution, client directed or semi-discretionary investments are made on behalf of clients in a separately managed account structure, rather than in a co-mingled fund. However, significant volume pricing and liquidity benefits can be generated for the client by a single cash execution team managing both agency lending collateral and long cash deposits. Clients can access a range of investments, across broad tenors, again leveraging our ability to arrange, execute and manage the transaction lifecycle.
Responding to capital constraints for primes
At the end of July, the US regulators released their eagerly awaited update on the Basel III framework. Among the myriad of details in the 1,000+ page proposals, there was a detail that included a broader range of non-bank financials in the intra-financial system calculations — an amendment which could impact prime brokerage businesses. Clients are mindful that the capital environment may become ever more constrained and they wish to position themselves for an alternative route to market should prime balance sheets reduce. We see increased appetite from our clients within the agency lending programme to lend securities directly to hedge funds and investment funds. J.P. Morgan’s Agency business benefits from being part of our broader Corporate and Investment Bank and can partner with our prime brokerage business, which provides the platform architecture and servicing for fund borrowers.
The agency prime construct allows optionality for both clients, which can diversify counterparty exposure and enables prime brokers to move low return, prime financing activity into an off-balance sheet structure.
The lending infrastructure is now being enhanced to support both self-borrowing mechanisms and improved ability to facilitate peer-to-peer transactions. We see demand from clients to reduce external financing costs and we help them to expand the opportunities for their securities portfolios to be monetised. The self-borrow product can be used to support both intra- and inter-entity optimisation on an arms-length basis and this has worked to ensure that there is a high degree of flexibility with respect to activity rules and limits, collateralisation parameters and internal transfer pricing within the model.
Conclusion
There is continued development in this space and we see an ever increasing sophistication from clients and borrowers. At J.P. Morgan, we work in partnership with our clients to structure solutions and to help them to take advantage of the economies of scale and deep institutional relationships we can offer, enabling clients to employ better solutions for their liquidity and collateral requirements.
At J.P. Morgan, we recognised the convergence of the finance and collateral landscape and, in 2016, we positioned our business to best serve our clients by combining our collateral services and agency lending businesses under the Trading Services banner. In addition to our traditional product offerings, we have structured a range of flexible solutions within our Agency Financing Solutions business to help clients with a myriad of challenges — for example generating and deploying liquidity, self-borrowing or supporting client-directed transactions.
All of these solutions interlink seamlessly with the wider securities lending function by leveraging documentation, operational processes, reporting suites and execution capabilities from the agency lending business. The client experience remains consistent across all of the different modules, so clients have a feeling of continuity underpinned by a strong risk and control framework.
Supporting sophisticated lenders
We see increasing sophistication from our asset owner clients who are looking for their agent lender to seamlessly facilitate client-directed lending transactions. J.P. Morgan acts in an administrative capacity to provide an array of post-execution trade services on transactions arranged by clients directly with their counterparties. The services cover all of the core lending functions, including collateral management, trade lifecycle servicing, recall and substitution processing, regulatory reporting, fees and billing.
Transactions can be executed utilising J.P. Morgan’s documentation or the client’s own legal agreements with the borrowing parties or collateral managers. J.P. Morgan can also provide liquidation services for transactions executed under J.P. Morgan documents.
Helping clients to raise and deploy cash
As the focus on cash increases in this rising interest rate environment, clients have asked us for alternative solutions to raise and deploy cash. The long and short cash products allow clients to access a broad range of counterparties and collateral types through the agency securities finance platform. While a significant number of clients may have the in-house capability to trade fixed income sovereign repo and reverse repo, this does not extend to a scalable solution for equity or corporate bond repo and they are looking to outsource execution of those trade types.
We saw significant interest in our short cash solution following the gilt crisis in the UK last year, as clients experienced a squeeze to raise liquidity for margin in a timely fashion. Clients that had sizable portfolios of equities — such as S&P500 — which were not eligible under their derivatives CSAs, utilised our short cash solution to transform such equities into cash to meet the value margin requirements under a CSA. Clients can raise liquidity in USD, EUR and GBP, with transactions structured to meet tenors from overnight to six months. We are able to arrange, execute and manage the transaction lifecycle, reducing the legal, operational and infrastructure burden on clients.
Through our long cash solution, client directed or semi-discretionary investments are made on behalf of clients in a separately managed account structure, rather than in a co-mingled fund. However, significant volume pricing and liquidity benefits can be generated for the client by a single cash execution team managing both agency lending collateral and long cash deposits. Clients can access a range of investments, across broad tenors, again leveraging our ability to arrange, execute and manage the transaction lifecycle.
Responding to capital constraints for primes
At the end of July, the US regulators released their eagerly awaited update on the Basel III framework. Among the myriad of details in the 1,000+ page proposals, there was a detail that included a broader range of non-bank financials in the intra-financial system calculations — an amendment which could impact prime brokerage businesses. Clients are mindful that the capital environment may become ever more constrained and they wish to position themselves for an alternative route to market should prime balance sheets reduce. We see increased appetite from our clients within the agency lending programme to lend securities directly to hedge funds and investment funds. J.P. Morgan’s Agency business benefits from being part of our broader Corporate and Investment Bank and can partner with our prime brokerage business, which provides the platform architecture and servicing for fund borrowers.
The agency prime construct allows optionality for both clients, which can diversify counterparty exposure and enables prime brokers to move low return, prime financing activity into an off-balance sheet structure.
The lending infrastructure is now being enhanced to support both self-borrowing mechanisms and improved ability to facilitate peer-to-peer transactions. We see demand from clients to reduce external financing costs and we help them to expand the opportunities for their securities portfolios to be monetised. The self-borrow product can be used to support both intra- and inter-entity optimisation on an arms-length basis and this has worked to ensure that there is a high degree of flexibility with respect to activity rules and limits, collateralisation parameters and internal transfer pricing within the model.
Conclusion
There is continued development in this space and we see an ever increasing sophistication from clients and borrowers. At J.P. Morgan, we work in partnership with our clients to structure solutions and to help them to take advantage of the economies of scale and deep institutional relationships we can offer, enabling clients to employ better solutions for their liquidity and collateral requirements.
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