Sec lending industry aims to fight on despite regulatory burdens

The securities lending industry faces an uphill battle to maintain the profitability it has shown over the past few years, according to a panel.

Results from 2015 showed that securities lending was one of the more profitable parts of the business for major banks, a trend which has also occurred over the past two or three years.

BNY Mellon recently reported securities lending figures at $46 million in its Q4 2015 results while BlackRock securities lending revenue grew by $20 million compared to Q4 2014.

According to a panel at the Clearstream GSF conference in Luxembourg, the incoming wave of regulations will pose challenges to the business though.

“Another question the sec lending industry faces this year is how to maintain the level of profitability that was achieved last year as it was recognised that securities finance performed well in the last 2-3 years which did not look obvious 4 years ago,” said Francois Artigala, global head of securities lending at BNP Paribas.

“The irony of the regulation drive is to say that it put our activity on the forefront which was not expected and we must focus on maintaining this pace.”

The panel added that regulations have already started to impact the securities lending market, highlighting EMIR and UCITS V.

Speaking at the Clearstream GSF conference in Luxembourg panellists, including, discussed the impact of regulations including ESMA and UCITS V.

“The effects of ESMA’s regulations which came into effect in 2013/14 when the fund was formed are now starting to impact in terms of the appeal of UCITS,” said Maurice Leo, senior managing director at State Street.

“Certain UCITS’ traits including not being permitted to do term beyond seven days which pushes them out as well as the collateral concentration rates being slightly more problematic which might make them less appealing for dealers.”

Leo added that immediate impacts of UCITS V will also take hold with the inability to use pledge being considered particularly significant.

Speaking about the number of regulations that will take hold, David Skingle, head of fixed income at Barclays, spoke of how the industry may have to prioritise regulations with issues of liquidity in mind.

“Different institutions will have different priorities and hence you could get blockages in liquidity so 2016 will require open transparency with counterparties in order to maintain liquidity in the market and maintaining liquidity overall,” said Skingle.

In spite of such regulations starting to take hold, the panel agreed that there was still strong participation in the market represented by eight new firms attending September’s MN’s European beneficial owners’ securities lending & collateral management conference.

“Participation rates by ETF’s and the growth of that sector has been a big stimulus to securities lending and the supply to the industry has been positive,” said Leo.