J.P. Morgan Reviews Agency Lending Clients

J.P. Morgan is in the process of reviewing its activity with some of its agency lending clients, according to an executive at the bank speaking at the ISLA 2015 conference in Lisbon.

Securities lending agents are increasingly being hit by new capital rules implemented by jurisdictions under Basel III. This is because of the borrower default indemnification they provide to the clients of their securities lending programmes, which means they must set aside more capital.

“We are dealing with certain counterparties with a certain collateral, which may generate a capital cost… Our capital is sometimes large in comparison to the revenue stream generated by the underlying transaction,” says Stefano Bellani, global head of Agency Lending and DR Businesses, J.P. Morgan.

This is now leading to agent lenders reviewing which clients to keep, similar to that of their prime brokerage divisions.

“As a consequence, we are looking to reassess some of the activity, and possibly avoid trades that don’t make sense with certain counterparties,” says Bellani.

According to Bellani, the bank is looking at potential new agency models in order to deal with the balance sheet and capital pressures.

“It is a challenge of adapting and changing the business model with regulation. The questions are related about how you split the risk and capital costs along the chain when looking at the various agency models,” he adds.

Although intended to safeguard markets, regulations such as Basel III are having unintended consequences on liquidity. This is particularly being felt in the repo markets.

It is now the job of the agent lenders fill this gap and provide a means of short-term financing.

“We are talking to our clients about extending the trades’ duration, but it is sometimes difficult to find more (clients) that are willing to take on that risk,” Bellani says.