According to David Raccat, head of Global Markets, Market & Financing Services at BNP Paribas Securities Services the best way to cope with regulatory uncertainty is to invest in the business to help clients to adapt. It is with this in mind that the French bank created its market and financing services business line two years ago. Raccat talks about the changes since then.
How did the reorganization help to position the securities lending business for growth?
DR: Within securities lending we now have three business units. The first is agency lending for custody clients, which is offered from two hubs in Sydney and London and we are in the process of opening a third hub in New York, which will be up and running by the end of the year. We have a principle lending franchise where we can borrow and lend using our own balance sheet. Principle lending is split into two businesses – one for equity lending and another for fixed income or STIR (Short Term Interest Rates). We split those businesses into two because with the regulatory evolution and those collateral transformation and collateral upgrades business developing we’ve realized the expertise is quite different in the equity and the fixed income world so we decided to invest in the fixed income arena to develop the expertise as we see this as a growing trend towards fixed income.
The securities lending businesses were created two years ago. Before that we had a principle franchise, which was running everything. Then we decided to dedicate people to fixed income. The business model and axes are very specific and we need to develop expertise in analyzing the underlyings, working on maturities and tenors and analyzing the impact of any specific trade in terms of balance sheet, in terms of liquidity consumption, in terms of regulatory rations, LCR etc.
What is driving your business strategy?
DR: Two years ago I was spending 15% of my time on regulation and today it takes up 60% of my time. It is as if those [securities lending] products were a bit on the side until 18-24 months ago and all of a sudden the regulators are opening their eyes and realizing there is something called securities lending and repo and they need to take care of those products. As far as we’re concerned it all started to become quite significant with ESMA when the authority published their new guidelines on UCITS ETFs.
1.5 years ago, which set the rules for a much more restrictive framework on how UCITS can enter into securities lending. So there is more disclosure of information, more restrictions on fee splits and how they can share revenues with the asset management community, the lenders, the agent lenders, stricter rules on the collateral parameters, collateral diversification, eligibilities, quality, cash collateral and how cash collateral can be invested. There are a lot of rules which obviously are impact our business model and our profitability because the client might be a little bit reluctant about entering into securities lending. We have also decided to invest on our side to ensure that when UCITS funds want to enter into securities lending we can help them in the way they can monitor these new rules.
We have a dedicated collateral management product and we can help our clients optimize our collateral portfolios taking into account all of the rules that have been confirmed by ESMA.
In terms of strategy we’ve decided to split the equity and fixed income two years ago and today we’ve developed expertise on collateral upgrades, and optimization, which is more and more requested in the market from brokers and buyside clients given EMIR and Dodd Frank. Our ability to offer financing to our clients in the form of cash but also in the form of securities is to raise eligibility of collateral to complete our funding platforms. The other thing from an agency lending perspective is that our franchise and product is in line with what the market expects from us as a no 5 global custodian.
What has been the payback on investment?
DR: We are seeing more RFPs in agency lending. Last year we created a specific team in charge of onboarding clients. The business now has more clients, more assets, more traders and more desks so it has been a positive result.
Are you confident securities lending will withstand the regulatory change?
DR: I am. The market still has some very intense and good days in front it, but we need to make sure we can adapt to develop the business that is needed at the moment. We can still have some flow business and pick up on the equities side especially in Asia, which is very fragmented in terms of tax regimes. For me it is a very important area of growth, which is why our Sydney desk is pretty important for us in terms of positioning. We also need to understand what the regulators are trying to do. The FSB and the European Commission insist that securities lending and repo are key to market efficiency and liquidity they have strong pressure from the market and pseudo regulatory bodies like central banks who know that if repo were to disappear they would be in serious danger because all central banks use repo to issue their paper and hedge their positions, making sure the liquidity is guaranteed. We need to choose our fights carefully though because it is silly to fight against transparency and investor protection. To get the maximum benefit of return each provider needs to be rewarded adequately but the risks should be fair. But we need to ensure the regulators are not putting in place things that could be dramatic for the market. That’s why we need to play a role to demonstrate and explain that it [regulation] is a good idea but could have a negative impact.