Infrastructure "must improve" for stock loan industry to grow

Infrastructure "must improve" for stock loan industry to grow

A more streamlined electronic infrastructure providing interoperability across regions needs to be built in order for the securities lending market to grow, a new report suggests.

Aite Group's study released on Friday, entitled 'Securities Lending 101', concludes that although there have been some attempts to provide a true electronic order book, none have gained "dominant market share."

"Liquidity is fragmented across beneficial owners lending directly and agent lending programs; often, pools of lendable securities are not optimized within large firms operating multiple divisions," said Bill Butterfield, senior analyst at Aite and one of the report's authors. 

"Deals are often consummated via phone, email, and chat. For the sector to grow, firms will need to move toward a more streamlined electronic infrastructure that will provide interoperability across jurisdictions."

Butterfield and his colleagues also suggest that consolidation in the vendor space might breed better collaboration and movement toward electronic marketplaces and CCPs, as there are fewer players to consider in a consortium.

Pirum, 4Sight (now part of Broadridge), FIS, EquiLend, Markit, Stonewain Systems and Trading Apps are some of the key vendors operating in the space.

Phil Morgan, Pirum's global head of business development, told Global Investor/ISF that the secured finance industry is undoubtedly entering one of its most "transformative periods". 

"A greater requirement for automation in the SFT process as the industry evolves from the classic OTC model needs an equivalent evolution in approach from the technology sector," Morgan said, commenting on the report.

"Service providers don’t necessarily need to consolidate, but instead must enter into greater collaboration employing best of breed specialisms to develop the global infrastructure the industry needs to grow."

Aite Group, a research and advisory firm, based its study on interviews with 20 industry executives at the end of 2016.

Its analysts are confident that regulatory change will have the biggest impact on securities lending activity and "will not abate."

"Ultimately, some strategies will become uneconomical because of new regulatory requirements, causing a pullback in activity," added Virginie O'Shea, the firm's research director. 

"On the other hand, there will be knock-on effects of other regulations, which may spur increased activity."

CCPs and non-cash collateral 

Eurex is "leading the charge" when it comes to CCPs, Aite Group claims, given its collaboration with the two heavy hitters in agent lending: State Street and BNY Mellon. 

In the US, the report notes that the Options Clearing Corporation (OCC) provides a CCP for stock loan transactions and  clears roughly 10% to 15% of US equity loan transactions.

However, CCP adoption in the securities lending will be "slow and steady" according to Aite.

"In recent years, a few CCPs have emerged, though adoption has been tepid. It is, however, slowly ramping up, as market participants gauge the cost/risk benefit to using CCPs," the reports reads.

"It is foreseeable that regulators in some jurisdictions might mandate CCP use as they have for derivatives trades."

Meanwhile Aite's analysts reckon the shift toward non-cash collateral will continue, helped by the combination of low interest rates and pending regulation requiring banks and other large financial institutions to better fortify their balance sheets. 

Additionally, the demand for more non-cash collateral is "bound to have a positive knock-on effect" on securities lending activity, Aite's experts claim.

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