Industry representatives who attended a London-based event last week were equally divided in opinion when polled on whether regulation is a threat or opportunity for their business.
About 150 delegates at the Markit Securities Finance forum were asked whether regulatory changes around the increased collateral demand, trade repositories and indemnity charges posed a threat, an opportunity or a had a neutral impact on stock loan: 36.5% said regulation is a threat, while 36.5% said it is an opportunity.
Overall, 40.4% are optimistic and 39.4% are pessimistic about the outlook for the stock loan industry in the next two years.
A panel of two agent lenders and one beneficial owner then debated the outlook for the industry in the years ahead. “It’s a changing industry and it’s going to need greater technology investment,” said one of the agent lenders. “I’m not just talking about our core platforms, but its what we do in terms of benchmarking, looking at our tri-party agents and what they’re able to provide to us depending on what clients want from us. We’re only going to get that from technology.”
On the borrower side, the fight for capital and balance sheet could potentially see a reduction of borrowers, as they potentially focus their energy on a more profitable activity, he added.
The other agent lender said there are still opportunities in new markets. “Certainly there are many that are up and coming, both in EMEA, Asia Pacific and Latin America,” he said.
Amid flat lending revenues, the beneficial owner said the high cost base and wastage in the industry and the quest for efficiencies driven by transparency will force practitioners to think about whether they are adding value. “There is more matching, automation, STP and there’s going to be an enormous focus on who adds value in the chain,” he said. “Borrowers are going to want to pay less, for more and if you don’t want to earn less you have to become more efficient”
On revenues, one of the agent lenders commented that the industry is at an inflection point and revenues were likely to remain flat. “I don’t see the transformation trade as being the savior of this business, I think it’s all on the margin,” he said. “In Europe, the dividend trade is dead. We talked about the demise of tax harmonization but the new supply coming into the market is just driving down all-ins.
“The way I see this playing out if some of the regulations proposed go through, particularly for the beneficial owners, is it will require full disclosure, full reporting, board reports and overviews of what they’re doing in the lending program. And they’re not going to see the five cents you’re earning for them is going to be worth it. So I don’t see the overall revenue pie growing because there’s no more revenue to be made.”
The agent lender predicted that the regulatory change would lead to bifurcation in the market. “I don’t think anyone from the supply side will jump up and with the regulations there will be more peer to peer lending. There will be an insurance company that will be short cash and a sovereign wealth fund that will be long cash and they will have do the transactions themselves because the banks won’t have the balance sheet to do a repo trade.”
In the short to medium-term, panelists agreed that the focus would be on efficiency gains through technology. “We are spending twice as much this year than we did last year on technology and building efficiencies not just in front end process but downstream processes, more flexibility for client reporting because you don’t have the return on equity,” said one of the agent lenders.
“The business is still generating a significant amount of money and I think we’ve just got to spend our time on taking out the expense. The regulators are getting more ruthless about shutting us down if we are not making good returns on equity and we are wasting our company’s money.”
MSF Forum: Efficiency Key to Adding Value Amid Flat Revenues
Industry representatives who attended a London-based event last week were equally divided in opinion when polled on whether regulation is a threat or opportunity for their business.