securities lending times

The leading source of global securities finance news and analysis ISSUE 219 Conference Special

THE SONG REMAINS THE SAME

While balance sheet efficiency and alternative trade structures remain important
to beneficial owners, technology and regulation will also play a big role this year

ALSO INSIDE
Business as usual
Chris Valentino of Trading Apps explains how the company remains razor-focused
on clients and continued growth

Synthetic financing trends

Robert Levy of Hanweck explores the use of a new metric for looking at broad
aggregates of securities over the last two years to see if there are discernible patterns

Visit www.securitieslendingtimes.com for the latest daily news updates

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 Lead News Story

DTCC to provide trade reporting services in Switzerland

The Depository Trust & Clearing Corporation FinfraG aligns Swiss derivatives trading Transactions Regulation, subject to regulatory
(DTCC) has received regulatory approval regulation with international standards approval, and FinfraG regulations from a
from the Swiss Financial Market Supervisory and requires that firms with a registered single platform.
Authority to provide trade reporting services office in Switzerland report their derivatives
in Switzerland. trades to an authorised or recognised Valentino Wotton, managing director, product
trade repository. development and strategy, derivatives and
DTCC will provide this via their global trade collateral management at DTCC, said: “We
repository service (GTR) in Europe, which has GTR now provides derivatives trade reporting are pleased to have received regulatory
more than 3,500 clients sending over 500 services through its registered trade approval to provide trade repository services
million messages per month, with 46 European repositories across several jurisdictions and in Switzerland.”
regulators accessing its data. across all over-the-counter asset classes,
including credit, interest rates, equities, foreign “Market participants continue to seek a single
GTR will further expand its services to exchange and commodities. platform that handles trade reporting across
market participants in support of reporting multiple jurisdictions and asset classes, and
obligations that fall under the Swiss Financial DTCC’s GTR in Europe will now be able to fully we are proud to extend our capabilities to
Markets Infrastructure Act (FMIA), also known support the European Markets Infrastructure Swiss market participants and to provide
as FinfraG. Regulation and Securities Financing increased value to our clients.”

www.securitieslendingtimes.com 3
Inside SLT

Company Profile US Panel

Chris Valentino of Trading Apps explains Hot topics for this year for beneficial owners
how the company remains razor-focused on will remain the same, however, technology
clients and continued growth and regulation will play a big role
page 18 page 22

Publisher: Justin Lawson

[email protected]
+44 (0) 203 750 6028

Editor: Becky Butcher Performance Management Borrow Intensity

[email protected] Sam Pierson of IHS Markit explains that the firm Robert Levy of Hanweck explores the use of a
+44 (0) 203 750 6019 is taking a fresh look at the measurement of new metric for looking at broad aggregates of
securities lending returns securities over the last two years
Reporter: Jenna Lomax page 30 page 32
[email protected]
+44 (0) 203 750 6018

Junior Reporter: Maddie Saghir

[email protected]
+44 (0) 203 750 6019

Contributor: Barney Dixon

Creative Director: Steven Lafferty

[email protected]
+44 (0) 7843 811 240 Market Trends Data Analysis
Don D’Eramo of RBC I&TS discusses market Mainstream retailers are not the only ones
Published by Black Knight Media Ltd trends and the top opportunities for beneficial worrying about falling share prices, David
Copyright © 2018 All rights reserved owners this year Lewis of FIS says elite stores are no different
page 36 page 42

4 Securities Lending Times

News Round-Up

EC: No delays to SFTR go-live date

The European Council has informed Securities

Lending Times that there will be “no delayed
implementation” to the Securities Financing
Transactions Regulation (SFTR), after reports
of an extension to the current scrutiny period.

On 10 January, a European Council

representative stated: “On 8 January, the EU
Council decided to extend the one-month
objection period for six regulatory technical
standards (RTS) related to the securities
financing transactions regulation by another
month. New deadline: 13 February, no
delayed implementation.”

The European Council’s statement was in

response to the International Securities
ESMA issues latest double volume cap data Lending Association’s announcement that
the period of scrutiny had been extended to
The European Securities and Markets ESMA stated: “The instruments for which six months, with implementation expected
Authority (ESMA) has updated its public caps already existed from previous “to commence no earlier than July or
register with the latest set of double volume periods will continue to be suspended.” August 2019”.
cap (DVC) data under the second Markets
in Financial Instruments Directive (MiFID II). In addition, ESMA highlighted that some Seb Malik of Market FinReg contacted the
trading venues have submitted corrected European Commission, Council and Parliament for
The number of new breaches is 53— data that affects past DVC publications. assurance around the scrutiny extension period.
40 equities for the eight percent cap,
applicable to all trading venues, and 13 For two instruments, this means that Malik explained: “We can thus confirm that the
equities for the four percent cap, which the previously identified breach of the period of scrutiny for the EU Parliament is three
applies to individual trading venues. cap proved to be incorrect and the months; two months for the EU Council and
suspensions of trading under the waivers not six months as was incorrectly reported.”
Trading under the waivers for all new should be lifted.
instruments in breach of the DVC He added: “SFTR transaction reporting legislation
thresholds should be suspended from 14 As of 9 January, there is a total of 625 is set to achieve legal force in April 2019, as
January 2019 to 13 July 2019. instruments suspended. we have been advising. Banks and the second

6 Securities Lending Times

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News Round-Up

Markets in Financial Instruments Directive firms

will file their first reports in April 2020.”

According to Malik, the only two scenarios

that could change this would be if the EU
council or parliament raise an objection or if
the parliament extends its scrutiny period. He
noted: “We consider both unlikely.”

He said: “Our message to firms has been

consistent for two years—crack on with
implementation and ignore side chatter. SFTR
BearingPoint initiates solution for SFTR reporting will challenge firms both individually and
collectively like no other reporting regime before
BearingPoint has expanded its ABACUS/ and Money Market Statistical Reporting so it’s critical to focus on the task at hand.”
Transactions software with a new Securities to the second Markets in Financial
Financing Transactions Regulation (SFTR) Instruments Directive/Markets in Financial The European Commission adopted the
module, which helps institutions comply Instruments Regulation, and now, SFTR. Our delegated regulations comprising SFTR level
with the reporting obligations. clients can make the most use of synergies legislation on 13 December with firms set to
along the regulatory value chain.” go live with SFTR reporting in Q2 2020.
Bodo Windmoeller, BearingPoint’s
chief product officer of regtech, said: Alexander Becht, product manager for SFTR was published in January 2016 by the
“Market actors tend to underestimate the ABACUS/Transactions at BearingPoint, European Commission following the Financial
complexity drivers. Myriad regulations commented: “We have already adopted Stability Board and the European Systemic Risk
make financial services increasingly the established EMIR reporting logic and Board’s recommendation to mitigate the inherent
complex and costly.” infrastructure within our SFTR module, risks in shadow banking and increase transparency
enabling the automatic generation in the use of securities lending and repo.
“Reporting institutions can rely on the and submission of reports to the trade
various ABACUS/Transactions modules repositories from within the solution.” As part of the regulation, firms will be required
to reduce the negative effects of the ever- to report their securities financing transactions
increasing regulatory requirements.” He added: “ABACUS/Transactions has to a trade repository registered by the European
been in use since 2014 and has become Securities Market Authority.
He continued: “Our tried and tested well-established in the market, with
solution already supports various types of renowned clients in seven countries Banks release Q4 results
transaction-based reports, ranging from successfully using the software to
European Markets Infrastructure Regulation comply with several transaction-based Citi has reported net income for the Q4 2018
(EMIR), FMIA/FinfraG, Credit Support Annex reporting schemes.” of $4.3 billion on revenues of $17.1 billion.

A range of apps that will transform

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2016 and 2017
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8 Securities Lending Times

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News Round-Up

This is compared to a net loss of $18.9 Net income saw an increase of 67 percent. a challenging quarter, we grew markets
billion on revenues of $17.5 billion for the The year prior included a $2.4 billion revenue in the investment bank for the
Q4 2017. reduction to net income as a result of the year with a record performance in equities
enactment of the Tax Cuts & Jobs Act. and solid performance in fixed income.
Q4 2017 included a one-time, non-cash Investment banking fees were a record for
charge of $22.6 billion recorded in the tax Net revenue was $26.8 billion, up 4 percent, the year, driven by strength in both CIB and
line related to the enactment of the Tax while net interest income was $14.5 billion, commercial banking.”
Cuts and Jobs Act (Tax Reform). up 9 percent, driven by the impact of higher
rates as well as loan growth. Dimon concluded: “In 2018, we accelerated
Excluding the one-time impact of Tax Reform investments in products, services and
in both the current and the prior-year periods, This was partially offset by lower markets technology to help our employees,
net income of $4.2 billion increased 14 percent, net interest income. Noninterest revenue was customers and communities. In Q4, we
primarily driven by a reduction in expenses, $12.3 billion, down 1 percent, with no notable opened Chase branches in new states for
lower cost of credit and a lower effective tax drivers on a firm-wide basis, the firm revealed. the first time in nearly a decade. While it is
rate, partially offset by lower revenues. early days, we’re seeing terrific results so
According to JPMorgan Chase, the provision far, and this is only the start as we continue
On this basis, earnings per share of for credit losses was $1.5 billion, an increase to open branches in several new markets in
$1.61 increased 26 percent from $1.28 of $240 million from the prior year. the months and years to come.”
per diluted share in the prior-year period,
driven by the growth in net income and an Commenting on the financial results of eVestment: performance woes spotted
eight percent reduction in average diluted JPMorgan Chase, Jamie Dimon, chairman
shares outstanding. and CEO, said: “Last year was another strong The global hedge fund industry ended a volatile
year for JPMorgan Chase, with the firm 2018 in the red, making it the industry’s fifth
For the full year of 2018, Citigroup reported generating record revenue and net income, consecutive month of negative performance,
net income of $18.0 billion on revenues of even without the impact of tax reform.” according to eVestment.
$72.9 billion, compared to a net loss of $6.8
billion on revenues of $72.4 billion for the “Each line of business grew revenue and net The analytics firm found that aggregate
full year of 2017. income for the year while continuing to make performance for December stood at
significant investments in products, people -2.15 percent and for the year at -4.86
Excluding the one-time impact of Tax and technology, demonstrating the power of percent. The industry’s aggregate negative
Reform, Citigroup net income of $18.0 the platform. We grew core loans 7 percent, in performance for last year was nearly on
billion increased 14 percent compared to line with our expectations while maintaining par with the industry’s second-worst year
the prior year. credit discipline and a fortress balance sheet on record, 2011, when returns came in at
with significant capital and liquidity.” -4.99 percent.
Meanwhile, JPMorgan Chase reported a
record Q4 2018 net income of $7.1 billion Dimon added: “Credit and debit sales The hedge fund industry’s worst annual
and a record full-year 2018 net income of volume, as well as merchant processing performance on record came in at -15.75
$32.5 billion. volume, were all up double digits. Despite percent back in 2008.

10 Securities Lending Times

News Round-Up

eVestment said: “The 2018 performance strategies were hurt most by year-end the discussions on the European
is in stark contrast to the industry’s strong market declines. Commission legislative proposals for
aggregate performance of 8.93 percent in 2017 CCP resolution, which at the moment is
and almost universally positive performance Activist funds ended 2018 at -13.35 percent, on hold.
among hedge fund markets, strategies and suffering the industry’s most significant losses
geographies in 2017.” outside of emerging markets. Long/short The global authorities are currently developing
equity funds ended 2018 at -6.85 percent. India their resolution framework. Meanwhile, there
Commenting on the results, Peter Laurelli, and China-focused products posted the most is going to be a consultation for the Financial
eVestment’s global head of research, said: considerable aggregate losses for the year of Stability Board on CCPs resolution, with a
“The story in 2018 was very fund-specific, all segments, coming in at -17.04 percent and deadline of 1 February.
with some funds performing very well, while -16.84 percent, respectively.
other funds faltered.” According to Plata, it is important to have
EU CCPs post-Brexit plans need a good structure of resolution authorities
He added: “This highlights the importance of further development, says EACH in order to know who is going to take care
doing deep research and due diligence in the of what, which is something that the EU
hedge fund selection process.” European central clearing counterparties’ legislation would address.
(CCPs) post-Brexit plans need to be further
Despite the aggregate negativity, “there developed, according to Rafael Plata, This is why it is also important to have
were pockets of good relative returns”, secretary general at European Association of a legislation in place. As part of the EU
eVestment found. Origination and financing CCP Clearing Houses (EACH). legislative process, the EU Council and EU
hedge funds were the big winners in Parliament are required to provide their
returns in 2018, with performance of 3.94 Plata suggested that for the development, views and combine them and this becomes
percent. Long/short equity and activist European authorities need to advance the framework legislation.

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12 Securities Lending Times

 News Round-Up

The parliament view was completed at the “Step one is the default management ensure the continuation of critical services
beginning of last year. Now the council view process. This means that it is business is provided by the CCP.”
is on hold because the council gave priority as usual (BAU)—the normal default
towards other areas. management process of a CCP. It happens Plata highlighted that the industry needs
on a day-to-day basis. Initially, a member of legal certainty for participants that may be
Plata noted that for the moment, the the CCP—for example, a bank—participate under that regime.
expectation is that their work will resume in and they can go into default and the CCP will
March but this is not yet confirmed. need to apply their BAU tools to deal with He commented: “The other main reason
that default. All of that is governed by the is that in the resolution of our financial
Explaining why it is important for a resolution, European Markets Infrastructure Regulation institution, the taxpayer’s money could
Plata said: “At the moment there is no legislation in the EU.” potentially be at stake. This is what
EU regime for dealing with the resolution happened, for example, in the resolution
of CCPs. This creates legal uncertainty He continued: “Step two is the recovery of the of banks in the past. During the financial
because in a worst case scenario over a CCP system. If somehow step one is not efficient crisis, a lot of banks were saved using the
resolution, we are really talking about the enough then you go to step two; the recovery taxpayer’s money. From a risk management
‘Armageddon scenario’.” of the CCP is about using additional tools in point of view, we are totally against using
addition to the ones used in phase one. This taxpayers money.”
“If you think about the financial crisis during phase is also led by the CCP itself.”
Lehman—when Lehman went down— “If you have taxpayers’ money at the very
we were far from reaching a resolution. “Step three is the resolution. It is operated end of the process then it could be seen as a
Resolution for me is step number three out by the authority and is no longer run by the safety net by those who need to contribute to
of three potential steps to deal with the CCP so it would be the authority that is in avoid reaching that steak. As a risk manager,
defaults of members of a CCP.” control. It is a matter of using resources to we don’t want to weaken our current risk

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www.securitieslendingtimes.com 13
News Round-Up

management system by including a safety securities. The product will be labelled as quality data to a growing market. We’re
net at the very end, which could incentivise ‘Benzinga SLVX’ and the raw data feed will excited to use our skills as a data distributor
participants of the systems not to contribute be available to clients through Benzinga’s and media company to deliver the SLVX
to the recovery of the CCP.” licensing team. in a streamlined and engaging way to
our clients.”
Plata concluded: “I believe authorities are also Additionally, by calculating the spread of
against it, however, they like to be pragmatic rebate rates when borrowing a position Christopher Sappo, managing principal,
and realistic and therefore they ensure to short sell, the indicator can predict Tidal Markets, added: “I’m excited for
that in the worst case scenario, taxpayers movements without relying on the older, the opportunity to partner with Benzinga.
money could be used. We want to make sure more traditional volatility index (VIX), The ability to utilise a new instrument
that there are rules around it, which is why Benzinga revealed. for detecting volatility, especially in such
resolution legislation is needed to ensure that recent volatile times, demonstrates the
the taxpayer’s money is at discretion.” Before markets get turbulent, the spread in value-add the SLVX has to the investment
rebate grows and the SLVX anticipates the community. For so long, investors have
Benzinga and Tidal Markets team up incoming volatility. relied on byproducts of the VIX as the sole
on securities lending product indicator for detecting volatility—and that’s
John Bolton, vice president of data about to change.”
Benzinga and Tidal Markets have formed a operations, Benzinga, said: “The SLVX
partnership to deliver the Securities Lending presents a unique approach to anticipating
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14 Securities Lending Times

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been approved and/or communicated by Deutsche Bank AG or by its subsidiaries and/ or affiliates (“DB”) and appears as a matter of record only. Without limitation, this advertisement does not constitute an
offer or a recommendation to enter into any transaction. The offer of any services in any jurisdiction by Deutsche Bank AG or by its subsidiaries and/or affiliates will be made in accordance with appropriate local
legislation and regulation. Enhanced yield is not guaranteed, and agency securities lending services are not suitable for all investors. Deutsche Bank AG is authorised under German Banking Law (competent
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broker-dealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank AG, and its banking affiliates. Copyright© 2018 Deutsche Bank.
Malik’s Memo

Regulations to remember
Seb Malik of Market FinReg discusses key pieces of legislation working their way through
the system that will significantly impact the securities lending and wider financial industry
While we rightly plough resources into the subsequently transfer them to a legally The second Markets in Financial Instruments
well-known Securities Financing Transactions separate, self-standing entity, specifically set Directive (MiFID II): Crowdfunding service
Regulation, Brexit and European Market up for the sole purpose of issuing to investors providers (2018/0048(COD)): Authorised
Infrastructure Regulation projects, the industry a series of securities representing claims on European Crowdfunding service providers
should also take note of important regulations the proceeds from this underlying portfolio. should be excluded from the scope of MiFID II.
making their way through the system. I hope The various securities issued would bear
firms will commence analysing these proposals any losses from the underlying portfolio in a European Deposit Insurance Scheme
and make representations in order to shape certain sequence. (2015/0270 COD): In the Banking Union, deposit
better regulation. insurance remains purely national, which leaves
Credit servicers, credit purchasers and the national deposit guarantee schemes vulnerable
Counterparty Risk Requirement (CRR) II/ recovery of collateral (2018/0063 COD): Banks to large local shocks and member states’
CRD V: The European Commission is set to will be required to put aside sufficient resources budgets continue to be exposed to risks in their
finalise a package of Basel III measures with when new loans become non--performing, banking sectors. This act would both reduce the
implementation slated in for 2020. creating appropriate incentives to address non- vulnerability of bank depositors to large local
performing loans (NPLs) at an early stage and shocks and further reduce the link between banks
Bank Recovery and Resolution Directive-II: avoid a too large accumulation of NPLs. and their home sovereign by establishing the
Implementation of FSB’s Total Loss-Absorbing Single Resolution and Deposit Insurance Board
Capacity (TLAC) into EU law tailored to fit in Minimum loss coverage for non-performing and a common system for deposit insurance.
with the existing minimum requirement for exposures (2018/0060 COD): Amends CRR
own funds and eligible liabilities. The objective to deal with non-performing exposures. The Cross-border distribution of collective
of the TLAC standard is to ensure that global longer exposure has been non-performing, investment funds (2018/0041 COD): The
systemically important banks, referred to as the lower the probability for the recovery of its act will help reduce regulatory barriers to
global systemically important institutions in value. Therefore, the portion of the exposure the cross-border distribution of UCITS and
the EU framework, have the loss-absorbing that should be covered by provisions, other alternative investment funds (AIFs) in the
and recapitalisation capacity necessary adjustments or deductions should increase EU. These new measures are expected to
to help ensure that, in and immediately with time, following a pre-defined calendar. reduce the cost for fund managers of going
following a resolution, critical functions can cross-border and should support more
be continued without public funds or financial Exposures in the form of covered bonds cross-border marketing of UCITS and AIFs.
stability being put at risk. (2018/0042 COD): Amends Article 129 of Increased competition in the EU will help to
CRR. Defines covered bond. A union legislative give investors more choice and better value.
Recovery and resolution of central framework on covered bonds should expand
counterparties (CCPs) (2016/0365 COD): the capacity of credit institutions to provide AML (2018/0105 COD): Act will help to
The framework for the recovery and resolution financing to the real economy and contribute to prevent, detect, and combat money laundering,
of central counterparties legislation is the development of covered bonds across the the associated predicate offences and
currently working through parliament. CCPs EU, particularly in the member states where no terrorist financing. It will also provide for
are critical nodes in EU financial markets. market for them currently exists. direct access to the national centralised bank
This legislation will oblige CCPs to draw up account registries or data retrieval systems
and maintain resolution plans as well as Issue of covered bonds and covered bond to competent authorities. The competent
confer powers to competent and resolution public supervision (2018/0043 COD): It authorities, to which access is provided for,
authorities to intervene. will establish the structural features of the also include tax authorities and anti-corruption
instrument, a covered bond specific public authorities in their capacity to conduct criminal
Framework for the development of supervision, rules allowing the use of the investigations under national law.
EU sovereign bond-backed securities ‘European covered bonds’ label and competent
(2018/0171 COD): A private sector entity authorities’ publication obligations in the field We will be keeping abreast of developments and
would assemble an underlying portfolio of of covered bonds. It also amends UCITS, and performing interim impact analyses for clients
sovereign bonds from the market and would Bank Recovery and Resolution Directive. to allow them to stay ahead of the game. SLT

16 Securities Lending Times *All regulations are referenced from the European Parliament website
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Company Profile

Business as usual
Chris Valentino of Trading Apps explains how the company remains razor-focused
on clients and continued growth
At the end of last year, it was announced that those conversations have fueled a number of about Trading Apps, they realise the high
BNY Mellon purchased the agency lending interesting projects for Trading Apps this year. level of automation and the seamless and
securities finance software and associated sophisticated workflows that our apps can
intellectual property of Trading Apps. In terms of interoperability, it is all about offer. Many of our clients are leveraging
connecting to the various outlets or sources the automation offered by our lending,
Trading Apps has and will continue to operate of trade liquidity, market data, and settlement borrowing, and internalisation applications,
as a viable and independent entity, primarily and clearing that exist in today’s market place. and we have a number of projects outlined
servicing the securities finance community Without naming names for several of our clients, this year to enhance and expand upon
beyond agent lenders. we have already provided dynamic connectivity to those offerings.
the markets leading source for trade liquidity and
Now starting a new year, Chris Valentino, sales execution. At the beginning of this year, we look to In this age of big data, our clients and prospects
and client director, Americas at Trading Apps, expand that offering by establishing connectivity continue to push the envelope in terms of their
explains how the company remains razor- to a relatively new trading platform but one that insatiable appetite for all things data related.
focused on clients and continued growth. has been a household name for all of our clients Our apps continue to deliver high marks in
for years. We believe that to be just the tip of the terms of their ability to absorb enormous data
With the recent company merger and iceberg with some new trading venues on the sets and provide our user base with a high level
acquisition news and events in the proverbial scene, and with Trading Apps willing and able to of automation or an intuitive and sophisticated
rear-view mirror Trading Apps is gearing up for establish and provide seamless connectivity and workflow. This maximises technical real estate
a very exciting and extremely busy 2019. As integration for all of our clients and prospects. and aggregates all relevant market intelligence
always, our primary focus continues to be on at the point of trade for today’s securities
expanding our partnership with our existing Connectivity goes beyond just trade execution finance professionals.
roster of clients and of course adding some and we continue to work on a number of
new exciting clients or partners to the mix. interesting projects that will integrate data We are extremely excited for the year ahead
and establish various central counterparty and and look forward to working and collaborating
In many ways, the themes and bodies of work triparty connection points to the mix this year. with many members of the global securities
that hatched themselves in late 2017 and lending market place.
throughout last year will continue to be in our Automation continues to be a very hot topic
sights and on our radar for 2019. Interoperability, and for those that have used or are thinking
market connectivity, and process automation
continue to be popular buzz words for all of our
existing clients and prospects and as a result,
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SFTR Partnership

Two heads are better than one

Andrew Kouloumbrides of Xceptor discusses the firms SFTR partnership with DTCC
required. Whereas now, the burden of extracting, transforming and
Maddie Saghir reports
analysing that data sits within the service, making the process less
Can you tell me about the partnership between Xceptor onerous for the client.
and DTCC?
How will the platform cope with the influx of data?
By coming together, our partnership will help address the logistical
problems firms face in preparing for the Securities Financing Transactions The platform is an enterprise-grade platform so it can deal with vast
Reporting regulation (SFTR), which is set to go live in 2020. Any bank with volumes of data flowing through it and, indeed, it does so on a regular
a branch in Europe or trading in Europe will have to comply with it. basis. Global banks already use it for multiple operations and so there
are already vast volumes of data flowing through the platform.
SFTR, which requires counterparts to report securities financing
transactions to a trade repository, has very extensive requirements What were the main challenges in implementing this?
with over 153 fields to be completed. There is a fair amount of concern
in the marketplace around the extraction and formatting of that One of the key challenges from my experience is that even published
data, and this is the key reason why The Depository Trust & Clearing regulations continually evolve. There will always be tweaks that need
Corporation (DTCC) has partnered with Xceptor. to be made to them. One of the key factors that we are very aware of
in this partnership is to make sure that we are closely aligned to the
There will be a huge requirement to upload data from different sources regulatory bodies so that we can forward-plan for these evolutions.
and our offering will enable clients to input that data in any format.
DTCC will create the evolving rules and analytics of the SFTR regulations How will DTCC utilise Xceptor’s software to help with
that determine the value of the fields so that Xceptor’s intelligent data SFTR obligations?
automation software can capture the data, repair it, enrich it and
normalise it before submitting it for reporting. The service also provides The underlying service for SFTR will be the Xceptor platform. Xceptor
a pre-check review for data enrichment and validation that allows firms will be configured to consume the data fed into it by the end clients
to make corrections to the data before submitting to a trade repository. and transform it according to the rules and analytics created and
maintained by the DTCC. The platform itself will be operated by DTCC
It’s a vast improvement on past working methods. In the past, the so it is a true partnership and the start of a relationship that we hope
client had to provide the data in the format that the reporting entity will evolve to mutual benefit. SLT

20 Securities Lending Times

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The song remains the same
While balance sheet efficiency and alternative trade structures remain important
to beneficial owners, technology and regulation will also play a big role this year
What will be the hot topics for beneficial owners in borrowers are looking for different trade structures to meet their
2019? And what will be the key market drivers? specific requirements. These include different collateral and term
structures. It will be important for beneficial owners to be flexible
Vikas Nigam: Not a surprise but just like last year we believe the in terms of the types of collateral they accept and trade structures
song remains the same—balance sheet efficiency. Borrowers and they will allow in order to keep pace with the changing securities
repo/reverse repo providers continue to be extremely protective lending marketplace.
and conscious of their balance sheets and not just at quarter end.
Use of offshore entities, the beneficial owner’s risk-weighted asset Outside of our control, but likely to influence the market in the coming
(RWA) treatment, non-cash collateral eligibility and the provision of year, will be interest rates and volatility. The recent volatility in the
documentation to allow netting relief are increasingly factoring into market has shown that beneficial owners should keep a close eye on
their decisions on which beneficial owners to do business with. We how the volatility impacts their securities lending programme.
expect this trend to continue, especially as know-your-customer (KYC)
procedures become more thorough and frequent. Mike Saunders: Securities financing markets in the year ahead
will face similar challenges to those of 2018. Changes to monetary
George Trapp: The topics that beneficial owners will discuss this year policy throughout the global financial system in the form of
are a continuation of the themes from the last several years along with higher rates and an end to quantitative easing combined with
some emerging trends. Regulation has been at the top of everyone’s geopolitical tensions will continue to drive volatility. Historically,
agenda for the last several years. Recent developments on Securities elevated levels of volatility benefit participants in a securities
Financing Transaction Regulation (SFTR) and resolution stay lending programme and we believe this trend will continue. As
protocols have provided certainty around details and implementation such, beneficial owners should expect a greater demand for
timeframes. As these regulations are finalised and implemented they specific asset classes and sectors.
will allow the industry to position itself for the future.
The opportunity to monetise holdings of high-quality liquid assets
Alternative distribution channels and alternative trade structures (HQLA) will continue to offer stable and predictable returns. Beneficial
continue to be a focus for the securities lending industry. Central owners should be prepared to explore collateral flexibility and longer-
counterparties continue to gain traction and are working closely dated tenors in their programme as slight enhancements to a lending
with the industry to help provide efficiencies both from a trade programme will likely increase utilisation rates on HQLA as well as
matching and balance sheet perspective. Along similar lines, impact revenue streams.

PANELLISTS
George Trapp, senior vice president, head of North American client service, securities lending, Northern Trust

Mike Saunders, head of agency lending, Americas, BNP Paribas

George Rennick, head of agency lending, Americas, J.P. Morgan

Peter Bassler, managing director, business development, eSecLending

Glenn Horner, chief regulatory officer, managing director, State Street Global Markets

Matt Wolfe, vice president of product development, OCC

Vikas Nigam, director, head of trading, Americas, Deutsche Bank Agency Securities Lending

22 Securities Lending Times

 US Panel

The parabolic growth of the exchange-traded fund (ETF) product also and integrating systems across entities to make inventory easily and
presents a significant opportunity. Demand from counterparties to cheaply accessible is the new table stakes. More data enables better
borrow ETF’s linked to politically sensitive regions, specific assets modelling opportunities for machine learning and artificial intelligence
classes and operationally sensitive settlement markets will continue (AI); there’s little doubt that such a lucrative business (driving nearly $10
to be in high demand. This demand permits borrowers to have an billion in revenues, according to the recent DataLend announcement)
efficient and broad exposure to a region, sector or market which is is going to attract AI strategies. SFTR is a great catalyst for making
otherwise difficult to access. technology investments that can drive commercial results as well as
regulatory compliance. OCC is also focused on technology that can
Glenn Horner: Increased market volatility in 2018 magnified dispersion in give our members an advantage at raising their utilisation. We believe
performance among hedge fund managers. Whether institutional investors that distributed ledger technology has great promise for making
react to the 2018 performance with a reallocation among managers, an inventory easily accessible and cheaply conveyed. We’re convinced
increased allocation to managers who outperformed, or decide to shift that investing in technology to improve client outcomes will prove to
away from hedge funds will impact market demand in 2019. be wise decisions.

George Rennick: Regulation will remain a hot topic throughout Rennick: Beneficial owners should be constantly evaluating their risk/
2019 with a continued focus on Brexit legal entity strategies return parameters, working closely with their agent lending partners
and documentation, SFTR reporting preparation and the need to to evaluate their programme constraints. The business continues
spend significant efforts sourcing non-centralised data elements to evolve at pace and those lenders who can demonstrate flexibility
and respond to continued capital rule implications such as G-SIB across the multiple factors, which are considered when lending
requirements. The industry felt the impact of the capital rules and assets, will be best positioned to take advantage of opportunities.
potential G-SIB implications during the year-end turn as liquidity
tightened and short term funding rates spiked. Saunders: Securities lending is proven to offer incremental income
on idle assets in a relatively risk-averse fashion under the proper
One area where regulation is softening for certain beneficial owners is risk management structure. While it is certainly prudent to examine
around collateral. Beneficial owners that can take advantage of flexible your programme’s current lending parameters to increase returns, an
collateral schedules, term funding trades and a broad list of US and non- element of caution is certainly necessary. The impact of higher and
US borrowers will be best positioned to take advantage of opportunities. anticipated rising interest rates presents an opportunity to implement
several strategies to monetise both the interest rate and basis
How can beneficial owners position themselves for mismatch affiliated with a lending programme. The continued inflow
success in 2019? of securities lending cash collateral into prime money market funds is
evidence of this opportunity. However, it is necessary to understand
Peter Bassler: The best way to position yourself is to re-evaluate your the liquidity element associated with these types of strategies.
programme and assess the flexibility needed to capture the greatest
opportunity within your risk/return profile. Many beneficial owners
do not rethink and re-evaluate this product enough, and we would
suggest this become an annual process.
Whether institutional
Some questions to consider include: Are my guidelines suitable for
today’s lending and collateral environment? Has the agent landscape
investors react to the
changed? Where is pricing, indemnification? Many of these factors 2018 performance with a
are constantly evolving and it is crucial to have a regular cadence
to review your programme from a performance, price, partner and
reallocation among managers,
structure perspective. an increased allocation to
managers who outperformed,
Some firms have outdated cash collateral guidelines that could be
revised to capture additional yield in today’s cash markets. Cash
or decide to shift away from
yields have improved dramatically and non-cash alternatives can offer hedge funds will impact
a compelling structural alternative to cash and at times for a higher
intrinsic lending fee. We suggest a flexible collateral strategy, as not
market demand in 2019
all borrowers have the same preferences.
Glenn Horner
Matt Wolfe: For lenders, it’s all about utilisation. Years ago, that meant Chief regulatory officer
personal relationships, and they still obviously matter. This year, managing director
however, lenders are in a technology arms race. Collecting better data State Street Global Markets

www.securitieslendingtimes.com 23
US Panel

Non-cash collateral transactions are an alternative to these strategies In terms of indemnification, regulations and the
as they remove interest rate mismatch and liquidity risk while providing ensuing capital charges associated with providing it is
equivalent returns. Implementing a non-cash collateral programme increasingly changing how it is perceived, offered and
will serve beneficial owners well in 2019. The shift towards non- priced—how can the industry overcome this challenge?
cash collateral continues to accelerate as a percentage of market
share and beneficial owners would be well served to explore not only Horner: The implementation of Basel III and soon to be implemented
enhancements to their cash collateral guidelines but to their non-cash Single Counterparty Credit Limits (SCCL) have impacted the
collateral guidelines throughout 2019. perception of indemnification due to heightened capital costs for
agency lenders and the potential for limitations on balances with
Trapp: The critical aspects beneficial owners should consider for their large borrowers. The Basel III rules have already been implemented
securities lending programme are: and based on the Collins Amendment in the Dodd-Frank Act US
agents must use both the advanced and standardised approaches
• Collateral: Review your acceptable collateral and consider whether to calculate risk-weighted assets (RWA). The US banks must then
you can allow alternative types of collateral such as equities manage their risk-based capital ratios against the higher of the two
• Availability: Maximise the availability of your portfolio by methods at the bank level. For securities finance, the standardised
ensuring all of your accounts are approved for lending approach results substantially higher RWA than under the
• Restrictions: Consider whether your programme parameters are advanced approach, sometimes up to 30 times higher. As a result,
appropriate for the current market environment. Review your indemnified transactions that return a very high rate of return on
investment guidelines and any restrictions you have on your capital under the advanced approach now have an unattractive rate
programme of return based on the use of the standardised approach.
• Performance: Choose an appropriate industry benchmark
and review your performance and ensure it is meeting your The good news is that industry efforts have resulted in a new
expectations standardised approach for securities finance transactions that
• Risk: Review the reporting and set up a framework for regular we approved by the Basel Committee in December 2017. Once
due diligence on your securities lending programme including a implemented in local jurisdictions, this will result in a conservative but
review of borrowers, collateral, cash investment guidelines and much less punitive measurement of RWA, which will make the return
the creditworthiness of your lending agent on capital more appealing to agent lenders.

Nigam: Clients that will see the most success in this year are those SCCL may limit the amount of indemnified transactions that an
that are flexible in terms of the collateral types and counterparts that agent lender can do with a particular borrower. Under the original
they can deal in and with. New structures and new documentation are proposal, the measurement of exposure for securities finance
being sought by all lending providers and those that are able to accept transactions would be based on the current standardised method
some of those will see the benefits. for capital purposes. However, based on industry feedback the
finalised version in the US allows banks to use an approved
method for calculating capital requirements. This means that
banks with approved advanced approaches methodologies
can use their own VaR estimates of exposures. There is some
anticipation that once the new Basel standardised method is
adopted for capital purposes in the US it will then be the required
Clients that will see the method for SCCL. However, both the advanced approach and new
most success this year are standardised calculation will significantly reduce the impact of
this limit on current balances.
those that are flexible in
terms of collateral types To date, the industry has done a remarkable job of providing

and counterparts they can feedback to regulators and ensuring that the long term impact on
these regulations will have minimal impact on the balances and the
deal in and with future cost of capital related to indemnified transactions. However,
the industry is also looking at structural ways that the impact of the
regulations can be managed. A couple of potential ways that industry
participants have explored are through the use of collateral pledge
structures outside the US and the use of central counterparties (CCPs).
Vikas Nigam Both of these efforts are ongoing, but they are examples of how the
Director, head of trading, Americas industry can continue to redefine itself to meet the requirements of
Deutsche Bank Agency Securities Lending the beneficial owner community.

24 Securities Lending Times

 US Panel

Nigam: It is a provider by provider issue and not necessarily an Essentially indemnification is an insurance policy and like insurance,
industry issue. The costs associated with running the business differ the premium is related to the likelihood of drawing upon the insurance
from bank to bank and frankly client base to client base. Accurate policy. The securities lending industry could consider counterparty
measurements of resources used and active management of those credit evaluation and setting of collateral rates as ways to lower the
resources is key to overcoming these challenges. probability of drawing upon indemnification. If the counterparty risk
evaluation is effective and the collateralisation rate is more certain to
Trapp: Beneficial owners have resoundingly stated that indemnification cover the replacement cost of lent securities, then the conversation
is important and in some cases a requirement for their participation about indemnification may change. The guarantee provided by central
in a securities lending programme. Beneficial owners should clearing is another alternative that would help reduce the likelihood of
understand who is offering the indemnification, the financial strength drawing upon indemnification.
of the issuer and the capital base of the securities lending agent. It
is important that the lending agent has a strong capital base given Saunders: Regulation and the ensuing cost of indemnification
their role in the securities lending transaction. Indemnification should will continue to be a pain point for agent lenders and clients. The
complement a sound risk management framework including careful industry, for the most part, has been repriced to reflect the capital
review of borrowers, collateral, margin requirements and operational cost associated with indemnification through tiered splits, third-party
practices. A lending agent that has expertise in all aspects of the providers of indemnification, minimum spreads or various other
securities lending and collateral management process, along with a commercial elements. The crux of the conversation remains the
strong balance sheet, is in the best position to act as an agent for your same—the attractiveness of the pool of lendable assets for each client.
securities lending programme. Clients with optimal assets for lending or specific risk profiles will
benefit throughout this process and each lending agent views these
Bassler: Indemnification is here to stay. Period. It is incumbent upon relationships differently. Therefore, it is the notion of client selectivity
every agent to operate within their own firms to navigate costs, limits which becomes the main issue when discussing indemnification with
and the cost/benefit of various transaction types. However, as an lending agents determining how the capital will be deployed across
industry, we need to accept that the beneficial owners will continue to their lending programme clients.
demand this risk protection. Every agent has a different internal metric
and hurdle that will affect how they lend for their client base. The Rennick: Indemnification has become somewhat standard and
beneficial owner should be proactive in understanding these nuances expected as part of the core offering. At the same time, capital is a
as it will likely affect the trading the agent does on their behalf. finite resource and as capital charges continue to increase, certain
securities lending activity may become prohibitive for an agent lender
Some agents will avoid certain transactions due to their capital and a borrower. Similar to conversations in other parts of the financial
allocations. Is that in the best interest of beneficial owner’s or just industry, for example, between prime brokers and hedge funds, we
the agent’s? Is your agent committed to lending general collateral for are starting to have discussions with our lending clients about what
you or pursuing a non-cash strategy that you want to employ? It may is additive or detractive to a bank or broker dealer’s balance sheet.
come down to their capital hit. Asking the questions here is key.

Wolfe: Prudent risk management is crucial to the success of

any lending programme. The risk to lenders stemming from a
counterparty’s default has been mitigated primarily through
three components: credit evaluation, excess collateral, and
indemnification. Credit evaluation is an important step to Regulation and the
ensure that any new counterparties are creditworthy, and this
assessment should be reaffirmed on a frequent basis. Excess
ensuing cost of
collateral, (for example, 102 percent for cash collateral) is the indemnification will
primary tool that helps avoid losses should the lender need to
buy-in the loaned securities in the event of a borrower’s default.
continue to be a pain
Indemnification is a back-stop if the collateral is insufficient. OCC point for agent lenders
has a similar three-tier approach for mitigating risk. The first tier
is through careful assessment of new members and ongoing
and clients
monitoring. The second tier is margin collateral, which is based
upon econometric models of future stock prices and the amount
of collateral is recalculated daily to cover losses at a 99 percent
confidence interval. The third tier is a guarantee fund which is Mike Saunders
only drawn upon if the margin collateral was insufficient to cover Head of agency lending, Americas
the obligations of a defaulted member. BNP Paribas

www.securitieslendingtimes.com 25
US Panel

That education is critical as capital is a binding constraint for both those nimble enough to have the framework in place to handle the
the agent lender and borrower. One outcome may be one price for volatility will likely outperform.
indemnified business and a different price for the non-indemnified
business. Solutions to reduce capital footprints remain a priority Bassler: The new landscape during most of the last two years had
and alternatives such as central clearing or accepting collateral via been one of low volatility and upward stock markets. That changed
pledge will gather momentum as they benefit asset owners, lenders in Q4 2018 with market dislocation and higher volatility. This market
and borrowers. climate may be here to stay given global political and macro factors,
and it could lead to more short conviction and a better demand
After two years of Donald Trump’s presidency in environment for beneficial owners. We anticipated higher volatility
the US, how have beneficial owners adapted to the with the Trump presidency, but only recently have we seen it come to
new landscape? fruition. Staying engaged with your agent and other peers and market
participants is critical to remaining relevant as a lender, and then
Nigam: Beneficial owners adapt to market conditions, reacting to an evolving market in order to capture opportunity that the
which are obviously influenced by political administrations. financing markets offer.
It behoves them to watch the trends in the market when
making decisions, rather than reacting to the issue of the day How are beneficial owners approaching SFTR? What
in Washington. are the main challenges they are facing?

Trapp: Beneficial owners have felt the impact of the market volatility Saunders: The implementation of SFTR has consumed tremendous
in Q4, 2018 on their investment portfolios and on their securities resources within the firms participating in securities lending as
lending earnings. It’s hard to attribute what happened in the securities well as those providing securities financing services. The general
lending market back to the Donald Trump presidency, but certainly, the sentiment from a servicing perspective continues to focus on the
volatility has been felt across the markets. In terms of the regulatory successful implementation of the solution. These challenges have
landscape, there has been progress over the last several years as been eased with the assistance of third party vendors. However,
the industry looks to implement several new regulations. The current challenges remain on automating the data submission component
administration’s stance towards reducing regulation is favourable, and the sharing of costs to comply with SFTR. It remains an open
however, and will likely slow the pace of new regulations over the question as to how agent lenders will handle the commercial
coming year. elements of SFTR. Several agent lenders have absorbed this cost as
a matter of sound business practice. As SFTR progresses, certainly
Saunders: Regardless of political views, the landscape has proven beneficial owners will require bespoke reporting solutions which
beneficial owners and lending agents who maintain an active dialogue will add additional levels of complexity both in terms of costs and
to discuss, implement and monetise opportunities are well positioned. data sharing.
Market volatility will remain and likely increase throughout 2019 and
Despite these challenges, there is an opportunity as a lender to
synthesise the data to increase lending performance. The compilation
of market data is simply another data point which can be utilised to
benchmark the performance of a programme.

The new landscape during Nigam: It has been our experience that beneficial owners are relying
most of the last two years heavily on their providers for guidance and solutions with SFTR.

had been one of low volatility Rennick: SFTR remains at the forefront of discussions with some
and upward stock markets. beneficial owners more prepared than others, but all share concerns
That changed in Q4 2018 around the need to supply an approximate 150 data elements,
particularly since many of those elements lack consistency and a
with market dislocation and centralised source. Market participants will remain active in meeting
higher volatility the specific transaction reporting requirements, but asset owners that
delay focus may risk being left behind. We continue to articulate the
extra-territorial impact this EU regulation is going to have to the US
and the Asia Pacific clients.

Peter Bassler Trapp: We are working closely with the industry to ensure that the
Managing director, business development requirements for the SFTR are understood for our clients by the
eSecLending 2020 deadline.

26 Securities Lending Times

 US Panel

In terms of technology, what developments do you beneficial owners while offering higher levels of transparency. In
expect to see in 2019? And how are they benefitting a relatively low margin, high volume type of business, efficiency
beneficial owners? is a critical component and leveraging the tools of technology are
assisting the industry in their efforts to monetise opportunities in a
Wolfe: I expect we will see two technology changes in the future that cost-effective and risk-controlled manner.
will benefit beneficial owners: machine learning and distributed ledger
technology. SFTR is requiring that many more data points be captured Nigam: With SFTR and the unparalleled level of data that will come as
and made available in electronic form for European regulators. Firms a result, we expect to see vendors pitching new views on the industry
and vendors have been investing in new technologies to support and how it pertains to the beneficial owners. Additionally, we also
these requirements. Improved access to this more robust dataset expect to see a more concerted push for central counterparties to
could enable participants to apply machine learning in order to take on and counteract some of the balance sheet inefficiencies that
discover surprising and valuable insights. Similarly, distributed ledger currently plague the industry.
technology has the potential to not only improve the transparency for
beneficial owners but also to potentially enable beneficial owners to Over the next 12 months, how do you expect to see the
take a more active role in their lending programmes. I’m not confident securities lending landscape develop/change?
either of these will come to fruition this year, but I do believe we will
see experimentation and innovation over the coming year in both of Bassler: We expect to see greater beneficial owner engagement
these emerging technologies. and focus as securities lending continues to see more attention
across the investor segment. Beneficial owners are under pressure
Rennick: At J.P. Morgan, we continue to make significant investments to show value to their underlying shareholders and beneficiaries,
in our securities lending platform as technology remains a and securities lending is a pure shareholder value product. This
differentiator and true value add to the beneficial owner community. means existing lenders will be looking for new opportunities in
Clients have access to vital lending data and consolidated reporting, new markets, new collateral structures and potentially new peer to
while our advanced proprietary trading platform consolidates peer transaction opportunities. Agents and providers will continue
data repositories, trading parameters and the trade lifecycle with to have to keep up with the demands of the beneficial owners
advanced risk management and analytics as we draw from the from education, technology and overall innovation perspective.
firm’s quantitative research capabilities. Data consumption and The market will remain competitive as clients demand more, and
comparison will most likely be a key theme for beneficial owners focus on transparency, best execution and a partner that is truly
over the next few years as big data and AI will help drive decisions looking around every corner for opportunities or risks that are not
and opportunities. necessarily obvious.

Trapp: The increasing use of technology and automation continues Nigam: We expect to see a continued shift away from cash as
to bring benefits to beneficial owners. There is continued focus on collateral. The spike in treasury repo rates over year-end illustrated the
pre-trade, trade and post-trade automation to increase efficiencies for
the securities lending industry. In 2018, the expanded use of the NGT
platform added significant straight-through processing capabilities,
bringing increased levels of transparency and efficiency to the industry.
Northern Trust has built out our capability to take full advantage of
the improved distribution and pricing offered by the platform. This Data consumption and
year, our focus will be on the use of emerging technologies such as comparison will most
AI, robotics and machine learning to further optimise pricing and
distribution of client portfolios. likely be a key theme for
beneficial owners over
Saunders: Participants in securities financing transactions
are at various stages of harnessing technology to offer a more the next few years as big
compelling product. Each participant has a different focus as to data and AI will help drive
how they are spending their technology budgets. At BNP Paribas,
we have opted to focus on efficiency and transparency. We are decisions and opportunities
utilising AI and simplistic forms of robotics to remove many of the
daily, manual processes associated with a lending transaction.
These developments automate many of the low margin, high
volume transactions and enable more of a focus on bespoke George Rennick
trading strategies to extract value from a clients’ lending portfolio. Head of agency lending, Americas
The common denominator remains to generate more revenue for J.P. Morgan

www.securitieslendingtimes.com 27
US Panel

programme as we seek to deliver the benefits of securities lending

to our clients.

I expect the use of non- Trapp: Technology and automation are the primary focus of the
cash collateral will continue industry. Continuing to improve the distribution channels through
the use of CCP’s and fintech tools will have a large impact on the
to grow, and hopefully there future of the lending business. Beneficial owners can put themselves
will be continued dialogue in a position to benefit from these developments by reviewing their
collateral guidelines and ensuring they are aligned with the trend
with the US Securities and toward non-cash collateral.
Exchange Commission
Emerging markets will also provide opportunities for clients given
regarding the use of the need for borrowers to source supply in less liquid markets or
equities as collateral securities. As a custodian and fund manager, Northern Trust has
experience working in both developed and emerging markets to
provide access for our securities lending clients.

Matt Wolfe Despite the trend towards non-cash collateral, cash collateral
Vice president of product development investment can generate incremental returns for beneficial owners.
OCC
A favourable investment spread can have a significant impact on
earnings. Beneficial owners should review their cash investment
need to be prepared and have an alternative plan, be it shifting more guidelines to make sure they are aligned for changes in short term
balances to non-cash or signing up new counterparties that are not a interest rates.
balance sheet driven.
Rennick: The biggest changes will continue to be driven by
Saunders: At BNP Paribas, we expect this year to be a pivotal year as regulation, especially SFTR and potentially Brexit, G-SIB charges,
we realise the significant investment in several initiatives, which will the Central Securities Depositories Regulation and changes to
substantially benefit our clients. There will remain a continued focus collateral rules. SFTR will offer unprecedented transparency,
on extracting value, implementing technology and looking for cost- but will also challenge firms to first comply and then data
effective strategies to grow business. We will continue to leverage the mine for trends and opportunities. Outside of regulation, you
multitude of technology offerings which exist as well as continue with are seeing beneficial owners return to lending after a long
the development of propriety systems all with the focus on delivering pause post the financial crisis. You also see new entrants,
value to our clients and shareholders. Ultimately, client selectivity with lending portfolios seeking to increase challenged returns
and higher levels of engagement will become the forefront of our or possibly to offset fee pressures in the asset management
client segment, for example. Evolution is constant and the firms
that can adapt quickly and remain flexible are the ones that will
maximise opportunities.

Continuing to improve Horner: We expect beneficial owners to adopt peer-to-peer solutions

the distribution that will allow them to potentially increase utilisation/returns while
maintaining indemnification and operational/trade support from their
channels through the agent lender.

use of CCP’s and fintech Wolfe: I expect the use of non-cash collateral will continue to
tools will have a large grow, and hopefully there will be continued dialogue with the
US Securities and Exchange Commission regarding the use of
impact on the future of equities as collateral. OCC is working closely with the custody

the lending business banks and industry participants to develop a cleared programme
for non-cash lending. CCPs and peer-to-peer are exciting
initiatives that have the potential to increase utilisation, improve
revenues, and lower costs. Finally, I believe that the decreasing
George Trapp
cost and increasing access to big data and advanced data
Senior vice president, head of North American client
service, securities lending analytics and potentially new network paradigms will introduce
Northern Trust exciting developments. SLT

28 Securities Lending Times

 Through innovative client solutions,
the Global Securities Financing team
is always one step ahead.
Natixis 02/2017 © Shutterstock.com

NATIXIS AWARDED 2017

Best Global Equity Borrower
(group 2)

Best Global Relationship Manager

(group 2 Borrower)

Global Investor/ISF - Equity Lending Survey 2017

For more information, please contact:

Anand Krishnan, Head of Global Securities Financing - Americas
Tel.: + 1 212 891 6111 - [email protected]

www.cib.natixis.com
Performance Management

A fresh look
As the securities lending market continues to grow, Sam Pierson of IHS Markit
explains how the firm is taking a fresh look at the measurement of securities lending
returns and how they are reported to beneficial owners
Securities lending revenues for 2018 were the highest since 2008 as securities lending returns. There have been developments and new
demand for equities, credits and government bonds have all trended higher. functionality, but in the decade following the global financial crisis,
The challenge for beneficial owners has been that lendable inventory has this has not necessarily kept pace with the substantial change to the
increased at a faster pace than demand, which has spread the returns over industry and the structure of programmes. Even the term benchmark,
a larger base. The total lendable assets reported to IHS Markit crossed $20 with respect to securities finance, may be somewhat misleading and,
trillion for the first time in 2018, an increase of 110 percent since 2009, given the focus and reforms across financial market benchmarks, a
while loans out of that inventory have only grown by 23 percent. more fitting description which we will use henceforth is securities
lending performance measurement (SLPM).
As the securities lending market continues to grow, strategies for
realising the optimal mix of reward and risk exposure have also As the level of divergence and customisation in lending programmes
evolved. Accordingly, we are taking a fresh look at the measurement has dramatically increased, focus has been on adapting to regulatory
of securities lending returns and how they are reported to beneficial change, optimal revenue generation on specials and maintaining
owners. There is a lack of clarity on what a peer group contains, along income. From a pure mathematical perspective, when using average
with a necessary look at return drivers, which standard peer group returns as the benchmark, there should be an equal proportion of
filters lack the flexibility to capture. under and over performance. However, feedback from beneficial
owners typically yields some variation of the “everyone beats the
benchmark” refrain.
Lendable inventory by asset class

Sixteen years on from those early beginnings, the time is right for
an industry wide focus on the issues that drive these outcomes to
establish a global standard so that the industry as a whole—its
observers and its participants—can have the confidence that there is
one global agreed upon methodology.

Data consistency

There are different views across the industry regarding inventory

and lendable assets, which can lead to distorting performance
measurement outcomes when calculating returns as return to
lendable. This could mean that two identical funds, both generating
the exact same securities lending income, could have differing return
to lendable outputs, simply driven by differing views of lendable
In 2003, IHS Markit securities finance, then known as Data Explorers, inventory. Common areas of difference are: restricted markets,
pioneered the concept and paved the way for transparency in the restricted assets, regulatory lending limits, programme-imposed
securities finance industry. Since then the use of data within the buffers, foreign ownership limits on a company, client mandated hold-
industry has greatly increased and is now used not only for performance backs and buffers. More detailed consideration of these factors is
measurement, but is also embedded in the trading process from required when considering returns relative to lendable inventory.
automated programmes to the management of re-rates and intraday
spot-rate checks. Securities finance data also powers income estimates There is an inherent challenge in the way that the reference rate for
and projections, highlights liquidity and depth of market—particularly SLPM is calculated. In no other part of financial markets is a reference
for fixed income securities—and aids in the estimation of short interest. rate calculated where a considerable majority of the input has a zero
fee. At the end of 2018, according to IHS Markit, global utilisation was
While there has been an increasing use of the dataset across the 9.24 percent—lendable $19.1 trillion; on-loan $2.3 trillion—meaning
industry, there is more ground to cover with regard to the analysis of that 90.76 percent of the lendable input had zero fee. The classification

30 Securities Lending Times

 Performance Management

of lendable inventory into fee ranges will allow for greater specification Accuracy versus complexity
of returns, for example, return on specials inventory.
With so many variables that can materially impact SLPM, one possibility
Securities lending performance measurement generally weights is to have significant flexibility that allows greater customisation in
the assets across the industry to the same size and form as those order that there is an exact match between a fund and the peer group.
belonging to the fund being reviewed. This can create some distortion, However, such customisation is harder to manage, can become too
due to different programme structures and assets not actively lent, time consuming and lead to comparisons to a peer group of one. What
which leads to a higher proportion of funds outperforming. While the then is the right balance? We’ve taken one step in the direction of a self-
implementation by IHS Markit of a new preferred benchmark is aimed selecting peer group based on fund characteristics and size, which was
at starting to address this, further work is required. Due consideration made available in Q4. The removal of funds with limited activity can be
must also be given to alternative SLPM metrics, specifically the thought of as one of the first style-based peer group designations.
inclusion of current SLPM rate and a new active only SLPM rate, which
focus on returns on loans made rather than scaling returns by inventory. Disclosure

Part of the explanation for the “everyone beats their peer group” When a peer group has been selected for analysis it is important to review
narrative is the post-crisis emergence of different lending strategies, the total peer group inventory and returns profile in addition to the returns
specifically participation in general collateral versus specials lending, weighted to the client portfolio. Tracking the returns to the total pool for
where traditional peer group designations bely a potential range relevant asset classes supports understanding of the context for returns
of strategies. The key to delivering meaningful benchmark reports to the client portfolio and weighted benchmark. One advantage for multi-
going forward will be the combination of peer group clarity as well as agent beneficial owners is the ability to generate reports which show
consideration of style-based peer group filters. top level performance as well as agent specific breakouts, which can be
run against a consistent peer group. The disclosure of peer group inputs
Optional trades must be simple enough to understand and easy to replicate.

A fund’s investment objectives will greatly influence how optional Wrap up

trades such as scrips and cash/stock options are approached. A
fund that invests for income and a passive fund will usually take There are a few key threads here which we are focused on as we further
the cash option while a longer-term investor may elect for the develop the framework for securities finance performance measurement:
additional stock if their mandate allows it. At the portfolio level, the • Clarity of inputs and size of peer group
latter will usually have the most value (as the stock is often provided • Additional dimensions for specifying programme preferences
at a discount rate), but those forced to take cash effectively recover • Updated collateral specification
some of this discount via securities lending trade. Such securities
lending transactions usually have exponentially high income, and We are encouraged by the feedback we have received from our
that can disproportionately distort overall SLPM. This is especially clients both within agency lending as well as the beneficial owner
true when a portion of the universe does not need to engage in community for the next generation of securities finance performance
such transactions as they are already better off from selecting the management tools. We are committed to delivering a solution
stock option. for beneficial owners which clarifies the trade-offs in programme
specification and provides a meaningful performance measurement
Collateral details framework. Progress toward that goal is underway and we’re excited
about the roadmap ahead. SLT
We view the process of performance measurement as a complement
to the increase in regulatory reporting requirements. SFTR has
mandated the reporting of some lending transaction details, which
had previously been challenging for market participants to produce
in real-time. Looking at collateral details, the demand for more clarity
from the industry has been significant and consistent, as has been the
Director of securities finance

challenges in reporting for market participants. We anticipate that will

finally change in 2019.

While we work with clients on the provision of additional collateral

Sam Pierson

metrics, we are also working on restructuring the collateral

IHS Markit

flexibility buckets which define collateral usage for the current

performance measurement process. Of particular note is the
isolation of equity collateral.

www.securitieslendingtimes.com 31
Synthetic financing trends
Robert Levy of Hanweck explores the use of a new metric for looking at broad
aggregates of securities over the last two years
Hanweck launched borrow intensity indicators in March last year to valuation framework. On a day-to-day basis, most users naturally
provide intraday transparency into US stock borrow/loan rates and focus on single securities that are exhibiting significant changes in
inform people of trading and lending opportunities. The model is based term levels or are persistently hard to borrow (high intrinsic). The
on the concept of constant maturity synthetic lending terms rates focus here with the close of last year, is to explore the use of a new
from 30 to 360 days. Borrow intensity is expressed in the format of metric for looking at broad aggregates of securities over the last two
lending rebate rates and can be readily incorporated into a company’s years and to see if there are discernible patterns.

32 Securities Lending Times

 Borrow Intensity

Analytic approach Break-out by quintiles

In previous research, we have examined trends of borrow intensity Fees from the first quintile strongly dominate the overall fee distribution.
levels, counts of hard-to-borrow (HTB) securities of different ranges Note that the break between first and second quintiles occurs roughly
of intrinsic value and also categories of general collateral. Data is at a borrow intensity of -3 percent. Figure one below shows the total
generated from the exchange-traded options markets and incorporates fees by year for the quintiles, and figure two shows the behaviour of
predictive analytics, rather than based on bilateral transactions. the individual series over two years. The first quintile peaks in January
of 2018 where both its level and spread to other quintiles is widest. By
A relative measure is possible, with the help of underlying historical year-end of 2018, both the fee levels and spreads declined.
data in the option and equity markets. We used the data shown in table
one to construct a synthetic fee measure for a given maturity of borrow Monthly fee trends
intensity, in this case, 45 days. We then calculated a metric of dollar/
day at the 45-day rate, across the universe of HTB securities that ranged The synthetic fee measure is not intended as a value to be considered
from mild to high intrinsic value, and further breaking this group into on an absolute basis. That is, it cannot directly be compared to lending
quintiles, with the first quintile holding extremely HTB securities. fees reported in the physical market. It is a comparative measure of
option market-based fee trends, as it overstates the volume for options
This synthetic fee measure gives a fairer and more representative selected by using the entire traded volume, and then understates by
view of trends in aggregates of securities across time rather omitting other series that are nearly comparable (for example, a nearby
than merely looking at rates. Unlike an average rate view, the weekly) but not included. The goal is to account for both liquidity and
fees are not thrown off by illiquid low volume securities that are lending fee spreads and objectively base that liquidity on the options
extremely HTB. Conversely, milder HTB securities that trade in that would most likely be used in an actual conversion trade.
high volume can contribute significantly to the total.

The calculation of synthetic fee dollars is described below: Figure one: SEQ Figure \* ARABIC 1 - Fee Quintiles

Data for synthetic fee-dollar index

Daily data aggregated from intraday measures across entire US equity
option universe (Hanweck Historical Option Analytic data):
• Option expires that bracket target maturity
• Trading volume of nearest-to-the-money strikes for each observation
• Interpolated OIS rates as a term risk-free rate
• Hanweck Borrow Intensity data

Summary of analysis 2017 to 2018

The following results were generated from the data described in

table one above. The series is volatile on a daily basis, and so are
presented herein monthly or annual rollups to make any trends
more visible.
Figure two: Fees by HTB borrow intensity quintiles 2017 to 2018
We initially expected the results to be similar to fee trends in the
overnight securities lending market since the behaviour of rebate
rates and the distribution of overnight lending rates and term
borrow intensity levels are similar.

The process of bringing in options volumes, however,

appears to introduce a new dynamic beyond simply
a basis for weighting contributions upon liquidity.
There is no side-effect from put-call ratios because both are treated
equally for volume weighting. But the overall measure becomes
sensitive to the correlation of option volumes and synthetic lending
rates. This causes spikiness in higher frequency data and has visible
effects on the monthly series as well. It’s a phenomenon that bears
further investigation.

www.securitieslendingtimes.com 33
Borrow Intensity

Figure three shows a plot of synthetic fees aggregated across the full
Figure four: Synthetic fees HYG (iShares HY ETF) 2017 to 2018
range of HTB securities based upon 45-day borrow intensity.

Last year appears more volatile with peaks that exceed 2017 levels.
Additionally daily fee dollars exceed 2017 by about 20 percent in 2018.
The measure here is sensitive to option volumes as well as implied
rates, and these two factors both increase in January, August, and
November of last year to generate peaks in fees.

This contrasts with modestly lower security lending fees in the US

lending market for 2018 versus 2017. These are different segments
also, with lending fees mostly based upon the overnight lending
market, and this analysis strictly focused on a term segment.

Figure three: Synthetic fees by month

Perspective from borrow intensity and additional

option-based data

Borrow intensity indicators are created from tick-level data in the

Hanweck option analytics framework. In this note, we explored
a new indicators created from combining borrow intensity with
filtered options trading data from Hanweck historical data.
Synthetic fee dollars add the dimensions of liquidity and volume.
The most frequent applications of borrow intensity indicators are
two-fold: inform overnight lending rates and provide signals for
equity strategies.

In this article, we explored the behaviour of the set of equity names

Periods preceding and during major market declines that had at least minor intrinsic value to the most extreme of
hard-to-borrow—excluding general collateral. Last year, fee dollars
Interestingly, January and November activity both preceded months demonstrated more volatility than 2017 and modestly higher levels
of major equity market declines and increases, which implied overall, and particularly noteworthy: time periods of major spikes
volatility. January synthetic fee activity in particular spiked prior to in synthetic fees preceded periods of higher volatility and broad
the February volatility spike and liquidity distress. market sell-offs, including price declines in February and December
of last year. It’s exciting to find new ways to relate information
Much of the year-over-year increase in 2018 fees were due to these across the derivatives and cash markets, and Hanweck will look to
three periods. It’s also notable that fees in months where there publish periodic synthetic fees statistics in the future. SLT
was a major sell-off including February, October, and December all
showed fairly significant drops from prior months.

Volume changes are not consistent with this, so it appears that real
Head of business development

selling that occurred in these periods brought additional collateral

into the market, reducing lending spreads.

As an aside, this pattern in December was visible with single

securities also including some exchange-traded funds (ETFs). For
example, the ETF HYG as seen in figure three, shows a drop in fees
during the December 2018 period where it experienced the most
Robert Levy

precipitous price decline of 2018.

Hanweck

Fees were actually at the highest level in November 2018, a period

where the price decline in HYG had just started to gain momentum.

34 Securities Lending Times

Market Trends

Flexible structures
Don D’Eramo, global head of securities lending at RBC Investor & Treasury Services,
discusses market trends and the top opportunities for beneficial owners this year
What trends are you currently seeing in the securities Global financial institutions continue to optimise balance sheet
lending space from a North American perspective? requirements as the focus on regulatory driven liquidity coverage
remains a significant mandatory necessity in a post-financial
In North America, we continue to see shifts in the behaviour crisis environment.
of borrowers towards increased demand for automation,
a continued emphasis on balance sheet optimisation and Additionally, collateral optimisation in itself is increasingly important
collateral management as well as an overall shift towards further as the cost of financing remains top-of-mind. These two drivers of
non-cash collateral. demand persistently shape the changing demand landscape towards
increasing fixed income on loan balances and especially towards term
Levels of automation continue to increase as both borrowers and lending trades.
agent lenders look to streamline flows. There have been ongoing
efforts to utilise the latest auto-borrowing technology to actively Lastly, a common trend in the North American space this year,
manage inventory to borrowers thereby minimising the back and which is expected to continue, is an increasing shift to non-cash
forth communication on both sides. collateral. Borrowers are constantly looking for lenders to expand
their non-cash collateral offerings to include the acceptance of
At RBC I&TS, over 75 percent of our connectivity with counterparts exchange-traded funds (ETFs), American depositary receipts,
is automated allowing a greater focus on optimising high-value additional equity indices and non-investment grade corps.
lending by our global desks. Secondly, the demand to borrow
high-quality liquid assets (HQLA) continues to be significant in It is imperative that agent lenders engage with beneficial owners and
North America. continue the education on collateral flexibility, trends and expansion.

36 Securities Lending Times

 Market Trends

And more specifically, what trends are you seeing in Additionally, the ongoing focus applied to monetary policy on both
the Canadian market? sides of the border can be a key driver this year. As the interest
rate environment continues to change additional rate hikes can
The hot topic here in Canada for most of last year was the federal often translate to an increased demand for specific issues, but
legalisation of cannabis, which went into effect on 17 October. In also a general rise in yields can potentially lead to increased
the Canadian lending market, cannabis names truly dominated the demand for HQLA.
specials space for H1 2018.
With the ongoing change in the demand sentiment within the
However, as greater supply entered the market through share lending industry, collateral flexibility by beneficial owners should
issuances, lending rates began to see the effects of downward be considered a significant opportunity to further optimise lending
pressure stepping into H2. Recently, we have begun to see performance this year.
some renewed interest in directional demand following the
legalisation date in October as the market evaluates supply A well-known fact is that wider collateral acceptance can lead to
and demand dynamics as well as investor expectations greater overall lending performance, especially in an increasingly
of valuations. non-cash collateral market. Such flexibility is key in structured HQLA
opportunities and striking the right balance between risk appetite
Outside of the specials environment, the market in Canada is gearing and collateral acceptance is key to optimising any beneficial owner’s
up for some exciting changes in 2019 when it comes to the retail lending programme.
sector, as regulatory changes to national instrument guidelines have
expanded mutual funds to allow alternative investment strategies What challenges or opportunities will other areas of
within their retail funds. It is still early days but increased demand the industry face?
to borrow is expected as new funds are expected to launch in the
new year. Upcoming regulatory changes will continue to be a focus for the
industry; a major focal point centres around Securities Financing
As of 29 June last year, there were circa €950 billion Transactions Regulation (SFTR).
of equity securities on-loan from an available lendable
supply of just over €12 trillion. From your perspective, The transaction reporting phase of SFTR presents a challenge for the
did you experience a strong H2? industry to find a solution for all key stakeholders (beneficial owners,
agent lenders, securities borrowers, custodians and so on) as this will
From a notional balance perspective, equity balances do remain touch the basic core infrastructure of the industry. SLT
a significant component of the global lending market, both from
a general loan balance and revenue perspective. However, recent
downward trends in the market and a general softening of specials
made for a more challenging H2 2018.

It is actually now in the fixed income space where we continue to

see strong demand driven by high-quality liquid assets (HQLA) and
even in the corporate bond sector. Going into H2 2018 the demand
for HQLA continues to rise and specifically on a structured term basis
presenting greater opportunities for asset optimisation.

This year, what do you think the top opportunities for

beneficial owners will be in the next 12 months?

Appetite for HQLA was a significant demand driver last year with the
expectation of continued interest this year. Beneficial owners of HQLA
(such as Canadian sovereign and provincial assets), who are flexible
with their collateral acceptance, stand to benefit the most through
structured term lending opportunities—which we continue to see
increasing demand for.

The opportunity to capture premium lending fees for the ability to

lock in defined periods for lower grade collateral will be one of the top
opportunities for lenders this year.

www.securitieslendingtimes.com 37
What comes next?
With SFTR to take legal force in early April, Seb Malik of Market FinReg and
Fabian Klar of Regis-TR discuss what’s next for the regulation
The Securities Financing Transactions Regulation (SFTR) obliges an SFTR transaction reporting is due to achieve legal force on or around 3
approximately 10,000 firms to transaction report at a day-one cost of April this year, short of an objection being raised by the EU Council or
an estimated €150 million to €200 million. It affects firms as small EU Parliament during their three-month scrutiny period.
as non-financial counterparties right up to multi-national investment
banks and reinsurance firms. After the Promethean torture of having to endure a one-and-a-half-
year delay, the EU Commission finally adopted the long-awaited level
SFTR requires a huge amount of data, much of it will not be held II legislation in December last year. These 10 delegated acts comprise
internally and it must be reported by the next working day with multiple the details. A lot of them are specific to trade repositories while the
daily trade lifecycle updates for the same transaction until expiration two that specify the details and formats of transaction reports have
for many transactions. general application.
 SFTR Insight

As a leading trade repository, we at Regis-TR have been poring over all Managers (AIFMs) as well as insurance companies in October 2020
texts ensuring we pick up any differences between the Commission’s and non-financial counterparties January 2021—note the January 2021
adopted texts and the original the European Securities and Markets date is after the proposed Brexit two-year transition period that ends on
Authority (ESMA) drafts that were published in March 2017. 31 December 2020, the significance of this we’ll discuss below.

During meetings with clients, we are often asked ‘what happens next’? What does this mean in practical terms? During the phase-in period,
Did the Commission change anything in the adopted texts? When will matching will prove complicated because reports that are, in essence,
we have to file the first transaction report? How will Brexit affect SFTR? two-sided will remain one-sided due to the other side not yet having
What should we be doing? How can Regis-TR and Market FinReg help? been phased in. Regis-TR is aware of this quirk of nature and is taking
For the benefit of the wider community, I’d like to share my views. mitigating steps to reduce the number of non-matches.

What happens next? Data, data, data

The delegated acts were adopted by the EU Commission on various The word ‘data’ occurs 1,109 times in ESMA’s SFTR draft legislation
dates in December. While the EU Council adopted a scrutiny period final report. And if we were to single out the most challenging aspect
of one-month which they extended once to two months in total, the to transaction reporting, it would be sourcing the required data. The
EU Parliament chose a three-month scrutiny period. This means that required data is often siloed and so new systems and processes must
as long as neither institutions raise objections, SFTR will enter the be created to cut horizontally across verticals. A lot of data will not be
Official Journal on or around 13 March, achieving legal force 20 days available in-house and so will have to be sourced externally.
later—making 3 April the target date.
Regis-TR is interoperable across all the major data vendors. We have
The first firms to transaction report are the second Market in Financial forged partnerships with leading vendors who will be providing vital data
Instruments Directive (MiFID II) firms and banks, 12 months later— enrichment services for onward reporting to us. Our comprehensive system
April 2020. This much is confirmed. will be accepting transaction reports directly from clients, via delegated
reporting or via a third-party data vendor including Equilend/Trax and IHS
Should the parliament vote to extend its scrutiny period then this would Markit/Pirum. Taking Equilend’s multilateral trading facility (MTF) as an
push these dates out by three months but this is not our expectation example, it processes 90,000 plus new trades per day and 60 plus percent
for two reasons. Firstly, European elections are in May and secondly, of their NGT platform’s trade flow are SFTR reportable transactions. This
as we shall discuss, the commission has only made minor changes to flow can seamlessly be reported on to our trade repository.
the March 2017 drafts.
Electronification and SFT trade flow is shifting to MTFs as a direct
So, in summary, April 2020 is the date when the first transaction result of SFTR’s matching regime. With 96 fields (albeit 32 after
reports must be delivered to trade repositories. 24 months) being required to match to zero or very low tolerance
thresholds, having both sides’ data in one consolidated place such as
Did the EU Commission change anything? a trading platform makes the task of both sides accurately reporting
the same details immeasurably simpler.
Yes and no. The adopted texts are almost identical to the ESMA’s
drafts. The headline change is the number of fields to be reported Our EMIR trade repository regularly processes more than 30 million
has increased from 153 to 155. Table four now comprises 18 fields new trades per week for over 2,000 individual clients accounts.
compared to 16 in ESMA’s draft. The two extra fields are simple
currency fields to specify the currency of the reused collateral (new Product expertise and training
field 10) and the currency of the funding source (new field 17).
With our parent company, Clearstream, an active participant in the
The other changes are minor tweaks to validation rules including the securities financing markets, REGIS-TR already has unrivalled in-
textual description which has benefited from a helpful clean-up. house expertise in these markets and will capture a high proportion
of SFT reports across the UK and mainland Europe. We are also in the
When will we have to file the first transaction report? process of establishing a separate UK entity for our TR for UK clients
to Brexit-proof our operations.
As discussed, April 2020 is the start date, with the minor caveats
already cited. MiFID II investment firms and the Capital Requirements We have also partnered with Market FinReg, a leading consultancy.
Directive IV (CRD IV) firms—essentially banks—will be the first to Together we are providing cutting-edge SFTR training to empower
report. Thereafter European Market Infrastructure Regulation central your in-house operations, project managers and business analysts
counterparties (CCPs) and central securities depositories (CSDs) to perform vital project work. The training is available in person in
will report from July 2020; UCITS and Alternative Investment Fund London, Luxembourg, Frankfurt and Madrid or online with material
SFTR Insight

Market FinReg is helping firms to conduct gap

analyses to identify deficiencies in both data
and processes and subsequently
design appropriate solutions
Seb Malik
Head of financial law
Market FinReg

posted out. We consider it essential to get key personnel trained ‘onshoring’ SFTR, meaning that the UK is copying and pasting the EU
immediately to allow SFTR projects to proceed immediately in an SFTR and putting it onto the UK’s own law register.
efficient manner.
The UK Treasury explains that it would “create a dual reporting burden
Now that the legal texts have been adopted, Market FinReg is helping on firms as an inevitable consequence of the UK leaving the EU
firms to conduct gap analyses to identify deficiencies in both data and without a deal”. In other words, firms would have to report twice: once
processes and subsequently design appropriate solutions. to the UK TR and once to the EU TR. The treasury continues: “Evidence
indicates that this additional burden is not expected to be significant
A quick and immediate project that should be undertaken is to identify as firms would be reporting the same data, using the same templates,
all of the following entities that you interact with and to ensure they to both TRs.”
have valid legal entity identifiers (LEIs): counterparties, submitting
entities, branches, other counterparties, beneficiaries, tri-party agents, A further complication arises in that the level II legislation, that we
brokers, clearing members, CSDs, agent lenders, CCPs and security discussed at the beginning of this piece, which has not yet entered the
and issuers. EU’s Official Journal will not be onshored in time. We are left with a
vague “the government is acting to explore alternative means to ensure
Brexit that SFTR is able to function in the UK as intended in all exit scenarios”.

No piece would be complete without mentioning the six-letter word. A bill is currently passing through parliament that empowers the
The worst-case scenario is a no-deal (perhaps more accurately treasury to pass regulations for up to two years after Brexit. This
described as a minimalistic-deal) Brexit. Regis-TR has mitigated would solve the problem. In any case, I am confident the entire suite
against the worst-case scenario by establishing a UK entity. We have of SFTR transaction reporting legislation will be onshored to the UK
a long and established presence in London via our parent company in due course.
Clearstream and are building out our UK TR.
SFTR is a beast, but with our help, it can be tamed. As discussed,
While Market FinReg has been briefing clients with the lengthy Market FinReg and Regis-TR are offering cutting-edge training; it is a
minutiae, in summary, Brexit affects SFTR as follows: the UK is great way to learn the granular details from experts. SLT

I am confident the entire suite of SFTR

transaction reporting legislation will be
onshored to the UK in due course

Fabian Klar
Vice president, business development management
Regis-TR
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Data Analysis

Luxury losses
In recent months, much has been written about the struggles of mainstream
retailers and their falling share prices, however, David Lewis of FIS explains why
elite stores are no different
When considering the purchase of high-end luxury goods, including concern for high-end marques. One such influence is the Chinese
jewellery, cars, boats and even houses, if you have to ask the price, economy and its slowing rate of growth. Only this week, Jaguar Land
then you probably can’t afford it. This maxim is there to suggest that Rover announced a £2.5 billion cost-saving programme and, while
those buying luxury goods are rather more immune to economic they would not confirm this included job losses, it is hard to imagine
factors that affect people on lower incomes who might consider achieving those kinds of savings without up to 5,000 jobs going. This
interest rates and the cost of their mortgage or rent when considering is particularly likely when some manufacturing plants are already
significant purchases. Logically, then, the share price of purveyors on short time or have experienced periodic shutdown to “balance
of such luxury items should be relatively immune to most economic production levels”. The slowdown in China has been cited as a primary
factors, or at least those factors that affect the majority of consumers. cause, with Chinese nationals thinking harder about committing to
But is that really the case? big-ticket items.

It might be natural to assume that small changes in interest rates, Economic reliance on the future growth of the Chinese economy
for example, won’t affect high earners’ spending patterns, but bigger appears to be ever more acute, perhaps even eclipsing that of the
macroeconomic and even social issues may well be a cause for US economy as the world “pivots to Asia,” to quote the analysis of

42 Securities Lending Times

 Data Analysis

Figure one: Short interest volume two years to January 2019 | Source: FIS’ Astec Analytics

the former US President back in 2016. Other luxury goods reliant on Salvatore, matched by the levels of utilisation, suggesting a constant
the growth of high-end consumer brands in China include watches. level of supply as large investors kept hold of their investments.
Switzerland’s biggest export market for timepieces is Hong Kong, Richemont saw much greater volatility in short interest volume,
gateway to mainland China sales. Hong Kong and greater China rising sharply in February and staying high through to October, before
account for 25 percent of sales for Richemont (Compagnie Financiere bouncing back through November and December. Utilisation levels, by
Richemont SA, CRF), owner of Cartier, but including sales to Chinese contrast, stayed within much narrower bands, suggesting significant
nationals abroad, this rises to 44 percent. While this is a significant changes in ownership between large funds that lend and those that
level of concentration of one, albeit large, geographical segment, do not participate in the lending market. At 10 times the market
both Swatch (The Swatch Group AG, UHR) and Salvatore Ferragamo capital of Salvatore, Richemont is likely to see larger flows in and out
(Salvatore Ferragamo SPA, SFER) rely on China for even higher as investors adapt their strategies, but the differences in volatility
proportions of their annual sales. between volume and utilisation are marked.

Social issues can also affect financial performance, but these are While not all economic influences that affect share prices can be
significantly harder for analysts to predict. France has seen significant identified or predicted, such as social unrest or extreme weather
amounts of civil unrest in the last months of 2018, some of which has events, some, such as the relative health of significant economies
spilt over, although with less intensity, into 2019. Known as the “Yellow like China, can be more easily related to share price fluctuations.
Vest Movement,” their prime aim was to address issues affecting low- The impact on the luxury brands discussed here illustrates that the
paid workers in France through protest and direct action, but they have position a brand occupies in the market, with regard to price point and
also had a direct effect on the economy, including the high-cost brands the relative wealth of their clients is no protection from the economic
such as Richemont, LVMH, Moncler and Hermes. Richemont is least headwinds blowing some economies off course. Much has been
exposed, with France representing just 1 percent of the company’s written about the struggles of the more mainstream retailers, from
annual sales, but with 14 percent and 10 percent, respectively, Hermes Sears to Debenhams, but the falling share prices among the elite
and LVMH have suffered more from the pre-Christmas shutdown stores go to show that they are really no different to their lower-grade
across their Paris flagship stores. cousins in the end. SLT

Short sellers have been quick to capitalise on some of these economic

and social pressures, but not in a uniform pattern. Richemont and
Salvatore stand out from the pack, with Richemont seeing a significant
climb in short interest volume beginning in the fourth quarter of last
year, up by over 190 percent from 1 October. Richemont shares saw a
12-month trading low of CHF 60.44 just after Christmas, representing
a 39 percent drop from the 12-month peak of CHF 99.02 seen in May.
The shares have recovered a little in January, reaching over CHF 67 by
January 10. Salvatore followed a remarkably similar pattern, reaching
a peak of €25.50 in May and hitting a 12-month low of €17.17 in the
first week of January, a loss of some 33 percent. Again, the shares
have recovered a little, closing at €17.83 on 10 January. Figure one
David Lewis
shows the short interest volume for both Richemont and Salvatore Senior director
over the last 24 months, identifying a reducing trend through 2018 for FIS

www.securitieslendingtimes.com 43
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Industry Appointments

Comings and goings at BNY Mellon, HQLAx, BMO and more

Robert Chiuch has departed BNY Mellon as Stroemer commented: “I am extremely dealers, effective early March, according
managing director, global head of equity and excited for Nick Short to be joining HQLAx. to industry sources.
fixed income finance. He has played an instrumental role in shaping
our operating model during the R3 incubation Based in London, Atkinson will report to
Based in New York, Chiuch has served in the and acceleration projects, and I am very much Alexis Meissner, global head of banks and
role since May 2014. He has also served at looking forward to him helping to lead HQLAx broker-dealers.
BNY Mellon as managing director, global head into live production later this year.”
of equity finance and US head of corporate Currently, Atkinson serves as managing
bond finance and managing director, head Mary Jane Schuessler has joined BMO director, head of global strategic initiatives,
of North American equity and corporate Capital Markets as director of global equity depositary receipts at BNY Mellon.
securities lending. finance, effective today.
He has served in various roles at BNY Mellon
Previously, he also served as president Schuessler will be focused on covering, over a 12-year period. Prior to this, Atkinson
and co-founder of the Canadian Securities utilising, and optimising its prime brokerage has also held roles at Euroclear, BNP Paribas
Lending Association between June 2009 and retail positions while improving their and Ivory and Sime.
and June 2012. He also worked as co-head overall client experience especially when it
of global securities lending at CIBC Mellon comes to servicing their custodians, asset Matt Culek has been appointed as managing
from 1993 to 2011. managers, pension and hedge funds. director, COO at Citadel Securities.

Nick Short has been appointed as COO of Based in Toronto, Schuessler will report Culek will work closely with CEO Peng Zhao
HQLAx and will report to Guido Stroemer, to John Loynd, managing director at BMO on strategy and management, establishing
founding partner at HQLAx. Capital Markets. overall resource priorities and launching new
businesses across the firm globally.
In this role, Short will oversee the build-out Prior to BMO, Schuessler was a director
of the operating model from a technical and and desk head-North America of securities He will also oversee the business level
legal perspective as well as ensuring that the lending at RBC Investor & Treasury Services COOs who drive the day-to-day operations
operating model meets the requirements of (RBC I&TS). of the firm.
the HQLAx customers.
In her position, she managed the global Culek served as managing director, global
Based in London, Short has been front office team who work to optimise head of business management, office of the
in this role for over a year in an lending revenue on behalf of RBC I&TS’ CEO at Citadel Securities.
acting capacity. custodial clients.
Culek first joined Citadel Securities in 2012
Short served at R3 for almost two and a half Additionally, Schuessler worked closely with as COO of Citadel Execution Services.
years but while at R3 he spent most of his business management and sales teams Prior to joining the firm, he served as an
time working with HQLAx helping to build out globally to develop growth strategies and associate principal at McKinsey & Company
the HQLAx operating model, which uses R3’s deliver on the strategic direction of the and as a capital markets associate at
Corda blockchain technology. securities lending programme. Lehman Brothers.

Prior to R3, Short spent 17 years at Goldman Schuessler has 13 years of experience in Pierre-Nicolas Bissonnet has left his role
Sachs building out collateral management the securities finance industry in Canada, as a member of the Europe, the Middle East
technology solutions for various funding spending two years working on the lending and Africa (EMEA) sales for fixed income
related departments including treasury, repo desk at RBC I&TS’ office in Sydney. and buy-side team at Deutsche Bank.
desks, and operations.
BMO Capital Markets believe that Schuessler Bissonnet held the role from March 2018 to
Commenting on his appointment, Short said: will be integral to the continued expansion of January 2019. He has worked at Deutsche
“I am very excited to be joining the firm. While its equity finance platform globally. Bank since 2012, where he started as part of
at R3, I spent most of my time working with the Euronext sales, investor services team.
HQLAx and the HQLAx idea went through the Neil Atkinson will join HSBC Securities
R3 innovation lab and I was involved with that Services as global head of client Prior to Deutsche Bank, Bissonnet served at
from the get-go.” management for banks and broker- PwC and Ernst and Young. SLT

46 Securities Lending Times

 Securities Finance Forum
BAFTA 195 Piccadilly, London | 20 March 2019
The Securities Finance Forum, now in its 22nd year, returns to London on 20 March 2019.

Join us for a thought-provoking discussion and engaging debate on the key industry
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Event Highlights
‒ Opening remarks with Lance Uggla, CEO IHS Markit
‒ Current market dynamics and outlook for 2019
‒ A Regulators View
‒ Debate: The Securities finance industry has continuously
evolved and innovated VS True innovation has not yet
occurred and the best is yet to come.

Learn more and register now:

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ihsmarkit.com/events/
Securities-Finance-London-
Forum-2019/register.html
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