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Analysis: Non-US banks eye up US sec lending
11 September 2013
Non-US banks have ambitious plans for US securities lending, finds Stephanie Baxter
US securities lending
US securities lending is set to enter a more competitive phase, with non-US banks seeking to gain a foothold in the market.
BNP Paribas Securities Services is due to go fully live early next year as part of its launch of a US custody business and Brazil’s Itaú BBA is in the midst of establishin a standalone US securities finance business.
And these launches follow Canadian bank Maple Financial Group announcing last year a restructure of its securities finance team to tap into more North American opportunities.
While these banks share a common ambition to increase their international reach generally, it is the US market that presents the most exciting prospects.
Some market participants doubt the ability of non-US banks to tap into this most well-established of markets, especially at a time when global securities lending volumes have still not recovered to pre-crisis levels. US pension funds are used to doing business with the big American names and may be reluctant to go to banks they are not familiar with.
On the other hand, US beneficial owners are increasingly seeking to do business with more custodial and agent lenders to diversify risk. One global head of securities finance says this has forced some of the big US banks that provide third-party lending to turn down requests by existing clients that wish to expand their programmes – let alone entirely new business.
These disappointed clients have to find additional providers, which potentially opens up opportunities for banks seeking to grow fledgling US businesses.
According to one US securities lending head, banks establishing new business in the US may be in a better position than their American counterparts to indemnify their clients against borrower default when this becomes expensive to provide under Dodd-Frank section 165(e).
Canadian banks in particular have gained a reputation for having healthy balance sheets so they should have the capacity to absorb more business. Some of the big US lenders could be forced to turn away new clients if they are unable to continue providing indemnification without suffering a big capital hit.
BNP Paribas’s Lance Wargo claims that 165(e) plays to the favour of the French bank because it is much smaller in the US than its competitors and therefore has less exposure. And it is highly unlikely that US pension funds would be prepared to forego indemnification as they do securities lending only on the condition of having this safety valve.
In truth it is unlikely that the big US custodial and agent lenders are worried about fresh competition for their existing book. The sudden rush of these banks into the US market is perhaps more an indication of new opportunities than an attempt to steal market share from the domestic giants. We shall see.