Trump policies could force shift to CCPs

Trump policies could force shift to CCPs

Donald Trump’s policies could lead to tighter access to balance sheets and an enhanced need to reduce risk weightings, prompting more firms to centrally clear stock loan trades.

Despite being too early to predict the economic or regulatory knock on effects under the new US administration, Chip Dempsey, chief commercial officer at clearing house OCC, says there are early warning signs of disruption for the securities lending market.

“Based on what we have seen and heard, his platform appears to be more focused on freeing up capital for small business loans,” Dempsey wrote in a note to clients.

“Some of his potential nominees for the Federal Reserve and other relevant policy positions in his administration have been calling for higher liquidity ratios in lieu of tighter regulation.

“If such actions were to occur, that could portend tighter access to balance sheets, more expensive bilateral credit, and an enhanced need to reduce risk weightings.”

OCC operates the only US central clearing stock loan service and has been broadening its appeal to agent lenders and beneficial owners of late.

Its traditional clearing members and early adopters of its securities finance clearing were mostly bank-owned broker/dealers.

The firm estimates that it clears about 10-15% of the $2trn US equities stock loan market

Nearly two million stock loan trades occurred on OCC’s central clearing platform in 2016 – a 37% increase on the previous year.

Dempsey believes this figure will rise and Trump’s policies could be a factor.

“Tighter access to balance sheets need to reduce risk weightings could pose a challenge to OCC's clearing member firms.

“This could cause us to provide novation for a wider range of the stock loan market in order to afford our member firms our two percent risk weighting as opposed to 20% or 100% percent with other counterparties.”

One of the key benefits of CCPs is favorable capital treatment, with the CCP acting as counterparty or trade performance guarantor.

OCC, along with other industry groups, claim the CCP model reduces a clearing firms' cost of capital by 71%.