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Securities finance: pushing for market harmonisation 

securities_financeDonia Rouigueb, head of sales for securities finance and repo at CACEIS, participated in our recent securities finance roundtable. She reflects on whether asset owners are likely to move their sec lending activity in-house and on broader issues, including steps to standardise market practice.

Will asset owners internalise their securities lending programmes in the face of lower spreads and loan revenue ? Are you noticing a shift from ‘outsourced’ to ‘in house’ securities lending activity? 

As a custodian bank with a sizeable agency lending and principal lending programme, we see little sign that asset owner clients are wanting to take their securities lending activity in house. 

Many of the largest securities lending providers are aggressive with their profit splits and, for the most part, it makes little sense for our clients to internalise this activity, even if they have the necessary scale. There is a high entry cost and this requires a lot of IT resources. When working with a profit split like 80:20, or 90:10 for very big clients - paying just 10% to manage the front-to-back processing, the SFTR reporting, and often with indemnification - that is truly low pricing. If a third-party provider will provide this service for minimal cost, why would a lender do this internally ?

What are the next steps in promoting standardisation and harmonisation of market practice ? 

More than digitalisation, the key lies in standardisation. Regulators do not like the lack of transparency in over-the-counter business and a primary reason for introducing the SFTR [Securities Financing Transactions Regulation] reporting obligations is to enforce greater transparency in securities financing transactions. Regulators understand that if we are to report financing transactions, we need to standardise terms around the fund transaction.

The buy-in and settlement discipline elements of the Central Securities Depository Regulation (CSDR) will also have important implications, particularly for equity lending. Fixed income can be a headache from a settlement efficiency standpoint. Counterparties may not truly fear the consequences when their failure to return a bond loan causes a settlement [later in a chain of transactions] to fail. But when there is an arbitrage linked to an equities ‘special’, this may present significant risk in case of a buy-in. 

From our Securities Finance roundtable in December issue: Securities finance roundtable: Time for the tin hats?

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