Results of 2011 Global Custodian Tri-Party Securities Financing Survey Published

The results of Global Custodian’s 11th annual survey of Tri-Party Securities Financing have been published today. The survey aims to measure the quality of the services received by clients of providers of tri-party securities lending, financing and collateral management.

This year saw some recovery from the crisis of 2007-09. Despite shrinkage across the whole of the securities financing market, and a continuing reliance on central banks for funding of the broker-dealing industry, many of the cash-supplying firms that exited the repo market completely in the crisis have now returned, and outstanding transaction values have returned to pre-crisis levels.

However, service providers still face a number of challenges. The dip in average scores owes most to a sharp downturn in scoring by respondents in the United States. The US domestic repo market is undergoing considerable upheaval as the recommendations of the Tri-Party Repo Infrastructure Reform Task Force are implemented. Cash providers in particular, which have not traditionally paid for tri-party services, are being expected to bear some of the costs of the transition. Among cash takers, deleveraging by hedge funds and broker-dealers has made market conditions difficult, and the Volcker rule will not make them easier.

In Europe, the continuing appetite for central bank funding retains its influence over the scoring, with those providers able to facilitate access to central bank money gaining some advantage. Tri-party, which has historically been used to finance non-government assets and odd lots of securities, is still suffering the after-effects of the flight to quality collateral in general and the structural shift away from structured credit instruments in particular.

The securities financing industry as a whole is undergoing a structural transition. A series of related developments -deleveraging, heavier capital and liquidity requirements, the search for term funding, political hostility to short-selling, the collapse or consolidation of broker-dealers, institutional reluctance to lend securities, electronic trading and central clearing of stock loan transactions, regulatory insistence on greater use of central counterparties (CCPs) in the OTC derivatives markets and the looming threat of regulation of so-called shadow banking are all having an impact on scale and activity in tri-party securities financing.

Provider ratings are mostly unchanged from last year, with one exception. Euroclear was unable to hold on to the top position in Europe, falling behind longstanding rival Clearstream. That said, the Brussels-based ICSD shares a top rating with SIX Securities Services as well as Clearstream. In Europe, BNY Mellon and J.P. Morgan earn Commended status only. In North America, on the other hand, BNY Mellon earned a Top Rating. Commended in Asia-Pacific, the bank was Top Rated on a Global basis. J.P. Morgan is Commended in Europe,  Asia-Pacific, and on a Global basis, but fell to Unrated in North America.

A perennial leader in client service and product innovation, Clearstream maintains its edge in overall scoring. “Very good understanding of our business needs,” writes a client, whose accolades include, “Top in communication. Very friendly staff. Excellent collateral management machine. Great flexibility.” The bank has reversed the decline of last year, earning overall top scores in all but two service areas. But Euroclear is not far behind, even gaining ground in an area where it has historically lagged: Fees. Euroclear’s efforts to lower costs and upgrade service offerings in the past year have not gone unnoticed by clients, who award the bank top scores. The bank also remains highly competitive in operational duties, such as fails management, margin calls (which are increasingly important in a marketplace characterized by multiple CCPs) and substitutions.

Although it was unable to maintain the gains of last year-weighted average scores fell in three out of four service areas-SIX Securities Services still earns scores that put it ahead of or close to the global average in three out of four service areas. Though still the smallest of the European providers, SIX can now claim to be a full-service provider, offering tri-party repo, collateral management, securities lending and collateral pledge services to international and domestic Swiss clients. It is poised for further growth.

BNY Mellon can be pleased by the results of the 2011 survey. Overall, scores are up as often as they are down, and the bank is winning higher scores from the habitually parsimonious European client base. Importantly, the bank outscores J.P. Morgan-its main competitor-in North America, Asia-Pacific and on a Global basis.

After raising its scores last year, J.P. Morgan’s momentum has stalled. However, it maintains a loyal client base, and returning respondents are gentler than newcomers. Indeed, one could not be more enthusiastic about the service. “Willingness to listen to a client’s request and work towards a solution with the client” is what he writes. “Feel like you are at the Four Seasons, not the Holiday Inn, when it comes to client service.”

One of only two truly global providers, J.P. Morgan earns its best scores from its growing client base in the Asia-Pacific region.

Response levels rose in 2011. In total, 242 responses were received, 213 of which were included in the final database after excisions for error, duplication and affiliation, which represented a 21% increase. The survey questionnaire covers six service areas (Costs, Servicing & Value-Added; Business Model; Collateral Optimization; Operational Efficiency; Operational Efficiency; Collateral Management & Monitoring; and Reporting & Communications) divided into 35 questions. Respondents rate their providers using a scale of 1 to 7, where 7 is excellent; 6, very good; 5, good; 4, satisfactory; 3, weak; 2, very weak; and 1, unacceptable. Average scores are weighted for scoring well in areas named as important in each service area by all respondents, and for the size and sophistication of the respondents themselves. To be Top Rated , providers must achieve a weighted average score that equals or betters the weighted average score of all providers in a region or in the survey as a whole. Commended  status is a more subjective category and takes into consideration factors other than scores alone. Providers whose scores are well adrift of the overall survey average are Unrated . Service providers participating in the survey were eligible for ratings on a regional basis for Europe, North America and Asia-Pacific, as well as a Global basis.

TABLE 1: League Tables

– Top rated      – Commended

* Only the longstanding survey rule preventing a shift of more than one rating a year denies this provider Top Rated status.

¹Global Custodian estimate calculated by adjusting downward the 2010 figure ($27.1 billion) by 9% and upward the 2011 figure by 11%, which was in both cases the average change experienced by all providers in the survey respective to year.
²Global Custodian estimate calculated by adjusting downward the 2010 figure by 9% and upward the 2011 figure by 11%, which was in both cases the average change experienced by all providers in the survey respective to the year. BNY Mellon no longer breaks down total outstandings into international and domestic components (the last figure provided was $310.0 billion for 2008), but publishes only a global figure for average outstandings, which was $1.8 trillion in 2011..
³ Clearstream says another $522.1 billion is held in Clearstream Banking Frankfurt, up from $501.6 billion in 2010.
⁴ Euroclear says it has another $279.0 billion handled by the Crest DBV system in the United Kingdom, up from $469.4 billion in 2010.
⁵ J.P. Morgan says its daily tri-party outstandings in the United States are $306.9 billion, up from $305.5 billion in 2010.
⁶ Figure translated from Swiss Francs at a rate of $0.97. SIX Securities Services has another $84.0 billion in domestic tri-party, up from $92.0 billion in 2010.