The complex balancing act of managing multiple regulations is becoming difficult to keep up, securities finance experts have warned. Senior industry figures at the RMA’s securities lending event admitted this week that things are “coming to a head” given the sheer amount of rules making the standalone economics of certain lending and borrowing trades increasingly unattractive.

On the lending side, agent banks are being forced to hold more capital against indemnified loans. There are also single counterparty credit limits to contend with, which place a quantitative limit on an exposure to one firm. These limits pose “the greatest compliance challenge” for banks with substantial capital markets activities, one individual told Global Investor/ISF, particularly when it comes to derivatives and securities lending.

Meanwhile on the borrowing side, broker dealers are grappling with the leverage ratio, net stable funding ratio and liquidity coverage ratios. As a result, balance sheets are constrained and there is a higher risk aversion from the investment banks themselves.  Many dealers have reigned in their repo business, for example, which means money market funds are having to find alternative places to park cash.

Another challenge, SFTR, looms on the horizon and will soon force all EU entities to report details of their securities finance trades to an ESMA registered trade repository. Firms outside of Europe will also be impacted by the EU's bid for more transparency. 

“The good news is the industry is resilient and has reacted to the flurry of new rules,” a legal expert at the event told Global Investor/ISF. “The bad news is that, when combined, legislation is now becoming far too complex and costly. Implementing one rule often has a negative and unintended impact on another part of the business. There isn’t a silver bullet to solve all of this. That’s one thing the industry desperately needs right now.”

New types of trades, counterparties and other types of collateral are increasingly being considered to mitigate some of the effects. The same can be said with clearing arrangements and the use CCP structures. The challenge here, however, is to attract enough buy-side participants and then provide the necessary features to encourage further use.

“The problem is that these changes, such as CCP adoption, don’t happen overnight,” a US-based broker dealer added. “I fear that the industry might be moving too slowly. There’s a real danger of complacency. Lobbying regulators doesn't seem to be achieving a great deal. So we have to push forward now and, in order to do that, I believe we need industry-wide solutions.”

One agent lender added that his top concern was the diminishing returns from securities finance trades and that the market would soon run out of efficiencies. He added that the imbalance of asset growth on one side and shrinking bank balance sheets on the other is a major worry for the market going forward.