Data aggregators are set to change price transparency in securities lending, according to a white paper from Pershing Prime Services.
Due to the increasing number of prime brokers and agent lenders willing to share price information, investors are increasingly able to obtain a clearer idea of market rates, according to authors Craig Messinger and Gerrt Tamburro.
Previously, the lack of transaction data hampered the ability to create price benchmarks, and for hedge funds, actual costs were hidden from view by a bundled prime brokerage fee structure.
During the recent drive for data, companies like SunGard and Data Explorers have flourished. Data Explorers recently teamed up with information giant Markit to launch a US Sector Sentiment Index that aims to reflect sector level sentiment derived from securities lending and short-selling information. But despite these developments, the authors of the paper put forward the caveat that tax status and lending arrangements mean that data aggregators can only provide a partial view of the market at best. Nonetheless there is no question that data aggregators have shed light on information that has long been obscured.
The main winners, according to the paper, are institutional investors. According to a study of 92 U.S. pension funds by Finadium (commissioned by Pershing), over half invested in hedge funds or 130/30 vehicles, but many pension fund managers expressed personal distaste for leveraging investing.
According to Messinger and Tamburro, data transparency in securities lending will allow a hedge fund to create a best practice report card, similar to a transaction cost analysis in the equities markets, ensuring fairer treatment for investors.
For many, the main loser in increased transparency would be prime brokers. Greater transparency would mean lower fees, and greater choice. Quadriserv has launched a central counterparty in the US for securities lending and BNY Mellon recently became the first big agent lender to publically announce its participation on the CCP.
With the growth of a central counterparty for securities lending in the US, the need for traditional bilateral agreements would be void for a number of plain-vanilla securities lending transactions, depriving prime brokers of much needed revenue. Bundled fee structures would also come under pressure. However it is early days for the CCP, and Quadriserv have not released any trade volumes to date.
Unsurprisingly, Pershing Prime Services sees a different outcome, one that may even benefit prime brokers. The authors point out that although spreads would decrease, volume would increase along with more creditworthy counterparties. The authors also point out that the prime brokers are often the window through which managers enjoy transparency in the first place, providing benchmarks and a suite of cost-analysis tools to ensure appropriate pricing. They also have a valuable network of tri-party arrangements with custodians regarding collateral reinvestment, and they remain adept at find that hard-to-find security at the right time.
After the opaque days of synthetic collateralized debt obligations, transparency has become the key focus in most markets, including securities lending. However, this does not mean that transparency will revolutionise the securities lending industry. Kevin McNulty, CEO of ISLA, said: Im not expecting [the increase in transparency] to be transformational. I think we are going to see more and more transparency, but I havent seen things massively change as a result of it to date. Many hedge funds already have a pretty good idea about where the market prices things. The idea of having more than one prime broker has been around for a while, and players at either end of the spectrum, be they beneficial owners, lending agents or hedge funds, they have tended to find ways to understand how this market is priced, either through the data aggregators or they will use different service providers and benchmark them against each other. I am not sensing anything that will radically alter the market, although a CCP would be an important development for the market.
The Pershing Paper Open Book: Transparency Comes to Securities Lending can be found here