Participants:

Alastair O’Dell, Global Investor/ISF, chair
Craig Starble, chief executive, eSecLending
John Griffin, senior risk manager and head of derivatives & trading counterparties, Himco
Tred McIntire, managing director, Goldman Sachs Agency Lending
Doug Brown, managing director, Americas sales and relationship management, State Street
Mike McAuley , managing director and global head of product and strategy, BNY Mellon


Chair: Do collateral management and optimisation present opportunities for securities lending?

McAuley: At BNY Mellon we combined our businesses that deal with collateral into a single business unit called Global Collateral Services because we saw a unique opportunity to provide our clients with collateral solutions to help them succeed in the new regulatory environment. We provide solutions around segregation, aggregation, optimisation and liquidity.

Currently, we are seeing significant demand for segregation and optimisation solutions. The need for liquidity and transformation solutions is in the beginning phases. Those solutions will drive opportunities and increased demand for securities lending over the next few years as more products need to be margined or centrally cleared.

Brown: Regulators are really looking to decrease collateral velocity – the number of parties collateral moves to that could lay claim to the same assets. You need to have a collateral upgrade trade for derivatives clearing, but the regulators do not want a collateral downgrade trade, which is needed to provide the necessary supply.

Griffin: Collateral transformation has been a hot topic throughout the year, due to mandatory clearing coming into play and the margining movement for the Master Securities Forward Transaction Agreement that we are all negotiating right now. Demand has not been there for collateral transformation but everyone has been talking about it, checking out platforms and putting things in place so they know it works when they need it.

As rates go up and the liquidity landscape is potentially altered, such facilities may serve to be a very useful tool. Right now the haircuts seem a little steep. But we all know that in a different environment those same haircuts might seem reasonable.

Brown: Some asset managers that use derivatives are already reducing their physical equity positions, so they have enough cash to post for their derivatives trades. Regulations are already altering the way money is managed.

Griffin: Yes, it got more expensive when bilateral OTC books migrated to a cleared world. Suddenly there are initial margins where they previously may not have been required thus some buy-side firms did not have to put as much thought into those things historically, although maybe we should have.

Chair: Have any of the larger banks considered, or would they be interested in, a partnership arrangement with another lender?

McAuley: Partnering may be an option to allow trading of excess capacity as that applies to large exposure limitations. That would be dependent on client preferences. There are several other options to address counterparty limits such as diversifying counterparties, restructuring transactions and flowing certain transactions through CCPs.

Starble: It will change products. It will change how we all do business because everyone is going to have a different capital structure. The interesting thing is the industry will look less plain than in the past, because people will have different product offerings.

Brown: It is really going to come down to what is the most cost-effective structure for each organisation. Capital requirements are going to be different for each provider and each may go down a different path. The regulations are being structured to permit regulators to monitor us more efficiently and effectively, but I foresee increasing variety within the industry.

Griffin: That is the irony. Regulators would probably prefer a more plainvanilla world. It is going to cost the buy side and it may hurt a little. We may have to put on different trades. But as a risk manager, I quite like the idea of organisations looking for smarter trades. When capital was cheap everybody would book a trade to chase a nickel – now we are all thinking more intelligently about capital. We all have to make sure the trade makes sense and that is not a bad thing.

McAuley: We have educated our trading staff and provided them with tools to allow them to understand the capital impact of loan and collateral combinations especially as it relates to the borrowers. This helps them in structuring transactions in a way that preserves demand for our clients and also helps in pricing decisions.