policies could lead to tighter access to balance sheets and an
enhanced need to reduce risk weightings, prompting more firms
to centrally clear stock loan trades.
Despite being too early to predict
the economic or regulatory knock on effects under the new US
administration, Chip Dempsey, chief commercial officer at
clearing house OCC, says there are early warning signs of
disruption for the securities lending market.
"Based on what we have seen and
heard, his platform appears to be more focused on freeing up
capital for small business loans," Dempsey wrote in a note to
"Some of his potential nominees
for the Federal Reserve and other relevant policy positions in
his administration have been calling for higher liquidity
ratios in lieu of tighter regulation.
"If such actions were to occur,
that could portend tighter access to balance sheets, more
expensive bilateral credit, and an enhanced need to reduce risk
OCC operates the only US central
clearing stock loan service and has been broadening its appeal
to agent lenders and beneficial owners of late.
Its traditional clearing members
and early adopters of its securities finance clearing were
mostly bank-owned broker/dealers.
The firm estimates that it clears
about 10-15% of the $2trn US equities stock loan market
Nearly two million stock loan
trades occurred on OCC’s central clearing platform
in 2016 – a 37% increase on the previous year.
Dempsey believes this figure will
rise and Trump’s policies could be a factor.
"Tighter access to balance sheets
need to reduce risk weightings could pose a challenge to OCC's
clearing member firms.
"This could cause us to provide
novation for a wider range of the stock loan market in order to
afford our member firms our two percent risk weighting as
opposed to 20% or 100% percent with other counterparties."
One of the key benefits of CCPs is
favorable capital treatment, with the CCP acting as
counterparty or trade performance guarantor.
OCC, along with other industry
groups, claim the CCP model reduces a clearing firms' cost of
capital by 71%.