Securities lending: A wish list for 2018
We asked market participants from the securities lending community what they would like to see in 2018. Here’s what they said:
- A clear, stabilised regulatory environment
Unsurprisingly, this was top of the list. Policy has and will continue to impact operations, risks, overall participation and ultimately revenues for all involved in securities finance.
Looking ahead, industry groups (ISLA, RMA, PASLA) and most of the major players are set to continue working with regulators and the wider market to update, inform and educate on policy.
Brexit, Mifid II, SFTR and European money market fund reform will be on the agenda for 2018.
- A consistent global regulatory framework that is actually implemented that way
This is desirable for many although divergence (Brexit, Trump administration’s plan to roll back parts of Dodd-Frank) makes this unlikely in the short-term.
That said after years of talks, central banks and financial regulators have finally agreed on the Basel III rules for bank capital. That's positive and improves the regulatory framework across the globe, giving banks greater clarity about what's required.
Various jurisdictions are continuing to move toward implementing the Financial Stability Board (FSB) issued policy recommendations covering securities lending and repo transactions.
The European Commission continues to drive forward the Capital Markets Union (CMU), a project to boost jobs and growth in Europe. There is also continued focus on greater harmonisation of legislation in Europe's post-trade space.
- More volatility
Before 2017, a close below 10 in the Volatility Index (VIX) was an extremely a rare event. In 2017 alone, the VIX has closed below 10 on over 30 separate occasions.
Given the robust performance in equity markets, it has been a difficult time for short traders. This has had a knock-on effect on equity securities lending. The securities lending market will be hoping the number of equity specials, and the fees they generate, pick up again in 2018.
Out of 500 fund houses recently surveyed by Natixis Investment Managers (NIM), 66% believe volatility has been artificially suppressed by flows into passive investment strategies.
- A more open dialogue and engagement across the value chain
Participation in the securities lending market means engagement with a diversity of other players, from beneficial owners, borrowers to vendors and regulators. Clearly some believe there is a great deal of improvement needed in this area.
- Greater transparency
Asset owners told Global Investor that, when compared to other areas, they still consider securities lending to be relatively opaque and would like clarity into how the whole system works in order to drive down costs.
- New markets for continued growth
New market opportunities, particularly China, India and the Philippines are firmly on the agenda.
Dubai introduced short selling this week. Saudi Arabia began allowing short selling in April. Across Latin America, a number of initiatives are underway to boost the region’s securities lending markets.
- Bigger tech budgets
Nearly all respondents said they want more cash to spend on technology. Analysts at Aite Group recently predicted lenders and borrowers now spend close to $500 million annually on stock loan systems. This is only set to go one way. Key drivers behind this growth are a desire for aggregated front-to-back solutions and increasing demands for transparency from regulators.
Global Investor recently looked at how technology has helped HSBC’s agency lending business get more of its clients’ securities out on loan throughout 2017. We've also focused on new fintech entrants in the market, such as Wematch and Aquila.
- Positive, well informed coverage in the wider press
A few respondents said the industry continues to have a difficult relationship with major news outlets and they would like to see positive, well informed coverage in 2018. Some go so far as to say there is an anti-securities finance bias in the popular press.
- More RFPs
Most agent lenders put more RFPs on their New Year wishlist. The value of securities sitting in lending programs soared past the $17 trillion mark for the first time ever this year. As money continues to flow into ETFs, perhaps much of the growth going forward will come from the passive sector. Most agent lenders are being more selective in the types of clients that they are going after, meaning better, more relevant RFPs will be sought after in 2018.
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