Natixis: Moving to real time
Can you explain where the securities lending business now sits in the wider bank?
Regis Lavergne: Natixis took the decision to close its proprietary trading activities some years ago and none remains today. This allowed us to readjust our operational structure. We are now fully focused on our clients and their needs. Effectively, we relinquished the gross margin that could be earned from proprietary trading, in exchange for the benefits a larger client franchise can offer.
Yet such a strategy could only be successful if we built innovative solutions to attract new clients. So for the past two years we have prioritised key discussions – and followed through with detailed research and development – to build out a wider suite of tailor-made products. This includes a new synthetic prime brokerage service.
Dan Copin: At the same time, we have continued to improve our post-trade services, devoting considerable time and resources to help the trade cycle shift to a real-time environment. As soon as a stock is located in the market, for instance, a price is given to the client and the trade is executed.
Within seconds, the transaction is logged in our system, so we can immediately check that our record corresponds with that of the client. If there is an error around the trade date or the valuation date, this is flagged up immediately and we can notify the counterparty. We will often find ourselves detecting errors in client records before they have.
Has post-trade become more important to clients then?
Copin: Certainly. In recent years, the quality of post-trade services has become a key differentiator between securities lending providers. To succeed in the stock loans space, it is not always simply about providing the best bid in the auction. Operational risk has become much more important for our customers – sometimes more important than the price.
This feature often emerges in our negotiations, and it gains significant attention in the tender process. A client recently came back to us during the last round of an auction requesting an improvement in our price for a large securities lending portfolio. They gave us the option of bettering our bid, because they ultimately preferred to face us in the trade – our operational infrastructure was that valuable to them.
How would you rate the relative importance of post-trade services and greater customisation?
Copin: It is difficult to separate the two. By developing new technologies to improve our in-house system, we have freed up the time and capacity needed to listen to clients. And those consultations result in specifically tailored offerings that the client appreciates.
Generally, smaller players need to deliver both elements. Clients expect an efficient operational system with accurate reporting, which can also boast a comfortable level of operational risk management. Additionally, they are looking for new ideas and products that can help them navigate the current regulatory challenges.
Integration is key. We need to use each of the tools at our disposal to meet these challenges, by linking liquidity management, collateral management, stock loan and prime brokerage services. As a smaller provider, it is also vital to lead on this full range of services and have an experienced team that can provide a high level of customer support. Global reach also remains essential.
Can you expand on how regulation is changing the services clients are expecting?
Lavergne: Much of our discussion with both buy-side and sell-side clients is driven by today’s regulatory pressures, and they are looking to us to increase the range of solutions available, particularly to source the much-needed collateral to meet new regulations.
For sell-side clients – notably other banks and prime brokers – the principal focus has become the balance sheet and how best to utilise assets in a timely fashion. One element of our focus can be helping them achieve the right liquidity capital ratio (LCR), for example, without employing cash.
The second point to make here is that we are affected by these regulations too, so the conversation that our sell-side clients are having internally is the same as the one we are having. Again, it is based on how we can mobilise our balance sheet to ensure our holdings are fully optimised, both in terms of meeting regulatory rules and in gaining the assets clients need, when they need them. The way in which we work with clients, meanwhile, has become increasingly two-directional. Buy-side clients, for example, can capitalise from us when using services for collateral switching by providing our balance sheet needs around the LCR.
Interestingly, new regulations are accelerating our journey down the road we were already travelling on – of getting to know our clients’ businesses better, and using a more customised approach in designing our solutions.
Can you give an example of how collateral switching for buy-side clients might work?
Lavergne: To fullfil their regulatory capital requirements, clients in the insurance and reinsurance sector would historically have supplied regulators with letters of credit. And as the US insurance regulator is increasingly strict on the definition of regulatory capital, this opens the door for collateralised solutions with securities. These are very solid structures, thanks largely to the diversification and quality of the assets held as collateral.
The new initial and variation margin requirements under central clearing rules – contained in regulations such as Emir – mean insurance companies will have a significant need for eligible collateral. With this in mind, we are now providing “switching services”. This involves us taking their collateral and providing higher-grade collateral in exchange, which the client can then post to meet the more stringent requirements.
These examples show we can help clients finance their positions with us – but we are also able to help them finance their positions with other counterparties. We anticipate a growth in demand for this service, with the full expectation that we may need to compete alongside other participants, such as custodians, in delivering these services.
The fact is, the development of all these collateral solutions is prompted by regulation, so it is a paradox. On one hand, regulation is asking for more and more collateral needs, and on the other hand, other regulators may restrict the capability of moving collateral. This could be the case, for instance, with regard to the European financial transaction tax.
Can you give an example of the transformation the other way – how client collateral is being put to use by you?
Lavergne: Clients can earn fees by helping us to meet our own funding requirements. Again, the new LCR provides an example. To illustrate, it imposes a 50% haircut on the equities we hold. Corporates, asset managers and insurance companies – traditionally rich in higher-quality securities such as government bonds or cash – are therefore able to exchange these with us, posting the equities in return and charging a fee.
Do you see tri-party services playing a greater role in facilitating this new breed of collateral exchanges?
Lavergne: Regulatory changes have helped to persuade many buy-side participants to enter this space. Tri-party is quick, easy and safe, and relates to the growing importance of operational risk to clients. Pursuing the tri-party route removes many of the back-office requirements imposed by clearing derivatives. Furthermore, this type of delegation is especially useful for big corporates who would otherwise find it difficult to work with us bilaterally.
It is also a useful approach in emerging markets. Again, the benefit with tri-party is that you can get in quickly – using the pipes of the tri-party provider rather than having to adapt your own back-office systems. As we have seen spreads narrow in the established developed markets, there is increased demand for servicing these countries.
We are seeing a lot of business developing in eastern Europe, particularly Poland, the Czech Republic and Romania, the Middle East, including Israel and Turkey, and, in Asia, countries such as Thailand and Indonesia.
How are you treating the prospects for a shift of securities lending transactions onto central clearing?
Copin: As the prospects for a mandatory shift of securities lending trading into central counterparties (CCPs) are uncertain as yet, we want to adopt a trading solution that is as flexible as possible. We are leading the first wave of French lenders to implement the Eurex CCP clearing solution for stock lending. This solution will be in effect by mid-year and leave us fully prepared to face Emir requirements, should it be implemented.
Furthermore, the Eurex solution will also allow us to address a number of trading issues, making the solution attractive even if CCP clearing never becomes mandatory. Beside Emir risk, we will address the cost of capital management, trading limit management, post-trading cost and process control.
This movement toward CCP clearing will not replace current trading processes, but will complement them – giving Natixis more flexibility in proposing trading solutions. Basically, we are pre-empting the eventual shift of securities lending into central clearing by including it in a mix of important trading issues in the short to mid-term, enabling us to leverage its benefits to address a range of issues in one fell swoop.
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