SL-x Applies to Cancel FCA Authorization, IMN Panels Take Closer Look at CCPs

SL-x has applied to cancel its FCA authorization, approximately six months after receiving the FCA’s approval. Chief Operating Officer Hank Mlynarski has left the firm, though it is unclear if the two events are connected at this point. (Editor’s note: Global Custodian will have more on this story this week).

Meanwhile, IMN’s European Beneficial Owners’ Securities Lending Conference took place this week and took a closer look at CCPs, which SL-x had built its business around by adding connectivity to Eurex and thinking that the industry would adopt the CCP model on a broader scale. At the IMN conference, several panels looked at what is holding the models back from the perspective of service providers and borrowers.

A panel looked at what agent lenders should be telling beneficial owners about CCPs. “From an agent perspective, I must admit we are still in the educational phase of understanding securities lending ourselves. The idea of giving clients direct access is critical as it’s a nice model. We need to understand the black box. We get very comfortable with bilateral because we understand it.”

The agent lender said that, in explaining CCPs to their clients, agents need to be comfortable that it’s not going to be additional risk.

Also, they expect some value attached to it, not just better market access. “It should be used as another route to market,” says the agent lender. “I’ve put a number that 15% of buy-in should go through a CCP but I look at it as a route to market for reduced capital cost and hopefully for the beneficial owner we can point to enhanced revenues. It has to have some tangible benefits to the beneficial owners such as revenue opportunities.

Another agent lender the said ability to trade, select counterparties and collateral are important progressions. But he shares the view that a better understanding of what’s in the “black box” is needed. “Why would you use it – it means return and it is a potential alternative to indemnification. It might be an alternative to indemnify if they are dealing with a CCP,” he adds.

“Its certainly on the radar for dealers with the view to migrating balances there. I think J.P. Morgan highlighted the need for CCPs to have greater upfront funding and come to some sort of post default process when they call on members after the event.”

Another panelist looked at the example of the CCP market in Brazil. “From our perspective it’s a market people lend in and you would have the credit risk with the CCP. If you’re willing to take that risk it can work and it’s just deemed to be another borrower. Braxil has a successful model.”

A borrower commented: “From a borrower perspective it helps me to get credit lines that you probably don’t get bilateral. The other thing lacking is the liquidity and the range of products because risk – its concentration risk.

Day two of the conference also took a snapshot of securities lending activity:

– routes to market used: agent discretionary (60%), exclusive (0%), direct lend (6.7%), mix of above 33.3%, other/ don’t lend (0.0%)

– what is your primary driver in route selection: revenue (7.7%), risk/return balance (53.8%), operational ease/ limited resources (38.5%), default – it’s what I know (0.0%)

– receptiveness to change/ new alternatives: very actively looking to improve performance (20%), watching/monitoring 60%, limited – will change if I must (20%), zero – would need to review merits of SL

For revenues to pick up further, panelists on the closing session said: “I suggest changing securities lending to securities finance. Then you start encompassing all kinds of other capital markets activities that may take advantage of your securities and long only assets may not necessarily go through a securities lending program. It’s just a different mind set and from there you still a consultant – you’re talking to your agent lenders but you’re encompassing a different set of opportunities that are going to be necessary going forward.