A more streamlined electronic infrastructure providing
interoperability across regions needs to be built in order for
the securities lending market to grow, a new report
Aite Group's study released on Friday, entitled 'Securities
Lending 101', concludes that although there have been some
attempts to provide a true electronic order book, none have
gained "dominant market share."
"Liquidity is fragmented across beneficial owners lending
directly and agent lending programs; often, pools of lendable
securities are not optimized within large firms operating
multiple divisions," said Bill Butterfield, senior analyst
at Aite and one of the report's authors.
"Deals are often consummated via phone, email, and chat. For
the sector to grow, firms will need to move toward a more
streamlined electronic infrastructure that will provide
interoperability across jurisdictions."
Butterfield and his colleagues also suggest that
consolidation in the vendor space might breed better
collaboration and movement toward electronic marketplaces and
CCPs, as there are fewer players to consider in a
Pirum, 4Sight (now part of Broadridge), FIS, EquiLend,
Markit, Stonewain Systems and Trading Apps are some of the key
vendors operating in the space.
Phil Morgan, Pirum's global head of business
development, told Global Investor/ISF that the
secured finance industry is undoubtedly entering one of its
most "transformative periods".
"A greater requirement for automation in the SFT process as
the industry evolves from the classic OTC model needs an
equivalent evolution in approach from the technology sector,"
Morgan said, commenting on the report.
"Service providers don’t necessarily need to
consolidate, but instead must enter into greater collaboration
employing best of breed specialisms to develop the global
infrastructure the industry needs to grow."
Aite Group, a research and advisory firm, based its
study on interviews with 20 industry executives at the end of
Its analysts are confident that regulatory change will have
the biggest impact on securities lending activity and "will not
"Ultimately, some strategies will become uneconomical
because of new regulatory requirements, causing a pullback in
activity," added Virginie O'Shea, the firm's research
"On the other hand, there will be knock-on effects of other
regulations, which may spur increased activity."
CCPs and non-cash collateral
Eurex is "leading the charge" when it comes to CCPs, Aite
Group claims, given its collaboration with the two heavy
hitters in agent lending: State Street and BNY
In the US, the report notes that the Options Clearing
Corporation (OCC) provides a CCP for stock loan transactions
and clears roughly 10% to 15% of US equity loan
However, CCP adoption in the securities lending will be
"slow and steady" according to Aite.
"In recent years, a few CCPs have emerged, though adoption
has been tepid. It is, however, slowly ramping up, as market
participants gauge the cost/risk benefit to using CCPs," the
"It is foreseeable that regulators in some jurisdictions
might mandate CCP use as they have for derivatives trades."
Meanwhile Aite's analysts reckon the shift toward non-cash
collateral will continue, helped by the combination of low
interest rates and pending regulation requiring banks and other
large financial institutions to better fortify their balance