Meaningful engagement between lenders and borrowers around risk mitigation is now the main goal for securities finance participants according to Ed Blount.

The industry expert, who founded Astec (later sold to SunGard, now FIS), reckons industry participants, particularly beneficial owners, must start a deeper dialogue and be open to new ways of doing business in order to deal with regulatory constraints. 

“As things are going, if lenders withdraw because agents cannot offer indemnification, there will be no securities to borrow,” Blount, currently executive director at the Center for the Study of Financial Market Evolution, told Global Investor/ISF.

“Without securities to borrow, there is no securities finance market. Then traders will no longer be able to use strategies which promote systemic stability, market liquidity and price discovery.

“I believe the key objective for securities finance is for lenders to engage with borrowers in such a way that risks are reduced and regulators are willing to offer capital relief to their borrowers and lending agents,” he added.

Programme indemnification (insurance to cover losses) is one of the most discussed topics throughout the industry and is set to remain so.

Regulation has made it more expensive for agent lenders to provide indemnification, as capital must be allocated against it being offered.

It is becoming increasingly common for agents to offer different fee splits for indemnified and non-indemnified programmes and it may be the case that they offer indemnification to certain clients and not others.

In a recent Global Investor/ISF survey, beneficial owners were asked how they would react if indemnification was no longer offered as part of the programme. 

Over half (59.6%) that they would close their programme. 9.9% stated that they would continue without indemnification. 

The remaining 30.4% stated that they would pay for indemnification.