In the face of Basel III regulations, beneficial owners need to reconsider their lending programme aims, said Andrew Dyson, chief operation officer of Isla.

Dyson explained that the effect of Basel III on increasing the general cost of capital would present challenges to lenders as well as borrowers. The increased cost of capital will mean institutions need to raise more capital to maintain their current level of business.

“As an industry we will be looking for new and interesting ways to think about how we judge performance. From a beneficial owner’s perspective, you need to think more about what it is you want from your securities lending programme. What is a good level of performance set against a set of criteria that you establish?” said Dyson.

“We’re getting to a stage where everyone’s in a peer group of one, everyone’s requirements are slightly different, their collateral requirements, level of interest from borrowers, expected return and so on. So I think understanding the relative performance of your programme will be an increasing challenge over time.”

Dyson spoke about some of the specific issues that Basel III might raise for beneficial owners. He advised them that ever more searching and detailed questions from borrowers should be welcomed.

“The reality is that people are asking the right questions and focusing on what they need to know to be compliant under this regime. It's important to understand why those questions are coming. It’s not just borrowers taking the initiative, it actually has a material impact on the economics of the trade.”

Addressing whether indemnification will become more expensive, Dyson explained that CRDIV brought up a number of unresolved questions around the way in which it will be treated for capital purposes.

“I think we’re still waiting to see where it goes. One of the challenges is that indemnification is very firm specific. Institutions are having to look very closely at whether indemnification is allowed from a Basel III perspective and what the true capital charges will be.

“It’s a bit too early for us to say if that means indemnification is going to go away or become more extensive but I think it will change over time.”

Dyson also assured the audience that Isla is actively working with the industry and regulators on indemnification as well as other issues, such as addressing the industry’s ability to offset collateral and net positions in different jurisdictions.

He echoed McNulty in expressing the opportunities that regulations could bring. He said that despite the multitude of issues it threw up, Basel III was a positive step for the financial community, particularly in making it take a longer-term view.

“It’s important to recognise that securities finance was seen as part of the puzzle around the 2007/8 crisis, and therefore it’s absolutely crucial that we see where regulation is going and what that means in the day-to-day work we undertake.

“I think in this industry we’ve been guilty of being quite short term in some of the ways we look at things. We only look towards the next end-of-year target. I think what we have to do is bring our heads up from that short-term objective and think what is this business going to look like in 2019 and beyond.

“It’s crucially important for beneficial owners to not think about just the next six to 12 months but the next three to five years. That’s one of the disciplines that Basel III has brought.”