Sec Lending CCPs Appear More Welcome as Industry Looks for Solutions

The idea of using central counterparties (CCPs) for securities lending has been around for a long time, but their adoption seems to be more welcomed now than ever before, as securities lending participants move past worrying about regulation into the phase of finding solutions.
By Jake Safane(2147484770)
The idea of using central counterparties (CCPs) for securities lending has been around for a long time, but their adoption seems to be more welcomed now than ever before, as securities lending participants move past worrying about regulation into the phase of finding solutions.

At the 21st Annual Beneficial Owners’ International Securities Lending & Collateral Management Conference in San Francisco, that mood of taking action has been prevalent, as panelists and other attendees dismissed notions that the new Republican-majority U.S. Congress would offer an opportunity to overhaul regulation, and instead the focus has been on how to optimize balance sheets as a result of the regulation that is by and large here to stay.

“Balance sheets at broker-dealers, who are the traditional conduits for securities lending, are contracting as a result of numerous regulatory provisions that are in place and are going in place,” said Michael Weaver, managing director, global head of Securities Lending and Financing at BlackRock. “And without a mechanism for removing some of the pressure from broker-dealer balance sheets…there’s serious potential for existing demand to wane in the securities lending market, and that’s something that’s not to the benefit of the beneficial owner community, it’s not to the benefit the agent lender community, and it’s not to the benefit of the broker-dealer community either. So we’re trying to figure out solutions [that reflect everyone’s best interests.]”

Now, CCPs appear to be a key solution, offering ways to significantly reduce capital costs and potentially reduce counterparty risk, while still allowing for certain relationship aspects built into the securities lending market to continue.

A live poll at the conference asked: “What is the first thing you think about when someone talks about the use of central counterparties in sec lending?” While 47.4% said they thought about the potential for additional cost and complexity, 42.1% said they thought about risk and regulatory capital mitigation. Another question asked if attendees had internal discussions about the use of CCPs for sec lending, for which only 21.1% said yes.

Thus, the results indicate that while there’s still a ways to go for more firms to actively explore the use of CCPs, the percentage of those thinking about the benefits is closing in on those who think it will be a burden.

«