Institutions Must Adapt to Meet New Securities Lending Market – Citi

As various regulations across the world continue to significantly alter the securities lending market, sell-side institutions must adapt their existing models to meet new demands from asset owners in the face of stricter rules on capital and central clearing, says a report from Citi.
By Joe Parsons(2147488729)
As various regulations across the world continue to significantly alter the securities lending market, sell-side institutions must adapt their existing models to meet new demands from asset owners in the face of stricter rules on capital and central clearing, says a report from Citi.

According to the report, regulations such as U.S. Dodd Frank Act and Basel III have challenged pre-financial crisis models because they have the potential to narrow the pool of asset owner’s willing to put their supply of securities out on loan.

“Changes in market structure and new capital requirements have driven securities lending activity away from a maximum utilization approach to a more intrinsic one,” says Sandy Kaul, global head of business advisory services at Citi and author of the report.

Furthermore banks may also look to reduce their lending activity, and instead take on more of an arranging role and support clearing of lending transactions through central counterparties (CCPs), or clearinghouses, because of the impact of Basel III capital rules.

Activity of securities lending through CCPs has grown significantly, as shown with Morgan Stanley joining Eurex Clearing’s securities lending CCP this month.

However, the new derivative clearing rules emerging from Dodd Frank and the European Market Infrastructure Regime (EMIR) could create opportunities for sell-side institutions to meet demands from asset owners for more options to fully optimize their supply of lendable securities.

Margin postings against collateral transactions are expected to rise significantly for cleared and non-cleared derivatives. The bulk of this collateral will consist of high quality liquid assets, such as government bond securities; in which the demand for such supply is expected to spike.

The report argues that this will drive lenders to a new type of “supply optimization”, which incorporates portions of the asset owner’s portfolio as collateral against a derivatives trade. Therefore an ability to advise asset owners on how to optimally direct different portions of their supply across a mix of agency and principal lending opportunities, while at the same time satisfying collateral needs, should help reduce un-utilized supplies in lending programs, the report says.

This could encourage organizations to bring together a broader suite of lending and derivative services under a single management structure.

“The sell-side must adapt to being a more holistic solutions provider, working to understand, service and optimize the entire breadth of a client’s potential supply pool,” adds Kaul.

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