From the desk of Raymond Blokland
Benelux Consulting Lead, Pierpoint Financial Consulting
When I started to work on a securities lending desk as a temp at the end of 1990, it was still very much a back-office job. Everything was fixed in those days. The fee levels were around 200-225 bp(!) for everything and we only accepted collateral in the form of letters of credit at a margin of 140 % (!!). Needless to say, we only looked at having sufficient collateral about once a week Personally, I had no knowledge at all of the stock markets or its processes. I had worked for a bank but in the area of commodity financing. But since everything was fixed in contracts, there was not much to negotiate anyway. All we needed to do was create instructions to move stock from our account to the counterparty and update our records so that we would not lend the same position twice.
Securities lending was not even the core of my daily activities, it was actually custody account reconciliation. Nevertheless, I did sense that this activity was more than just administrative when, in my first week, I received a ticket and hotel voucher on my desk to fly to London to attend a Christmas drink reception in the Guildhall, all paid for and organised by Prudential Bache Moneybrokers. (compliance played a very, very minor role in those days). I did not even have a suit. Neither me nor my colleague who accompanied me did, so we were easy to recognise in the crowd in our jeans, and at the end of the evening very drunk. It was my first encounter with the City of London after-work lifestyle!
However, it all changed quite rapidly. This was very much due to a new manager arriving that same year, who recognised that securities lending was a business and not a semi operational process. In order to gain necessary insight, I was sent to a training session in London, given to me by the company FinTuition. One of the trainers was a young Roy Zimmerhansl, winner this year of the ISF Lifetime Achievement Award. Today the same package (FinTuition securities lending courses with Roy as a trainer) is still available but reflects the current market and expectations for the future! Please check the Pierpoint website for all of the available courses. And, still as a temp, I booked something which would become the start of a type of trading, resulting in large volumes, particularly in certain periods of the year: the “all-in” trade.
From that moment it was a rollercoaster of product development and trading until the credit crisis of 2008 kicked in. At the peak, we had about forty counterparties and due to intense relationship management, we knew which borrowers were best for each market and asset class, and where to get the best levels. I remember this entire period as a constant exchange of ideas encouraged by a very entrepreneurial atmosphere. So many different trades, and every now and then a very big development that would dramatically change the landscape.
Here are some of the innovations that fundamentally changed the business:
Chemical Bank (now part of JP Morgan) introduced non-cash collateral to be held in triparty accounts, mobilising collateral and contributing to the elimination of letters of credit as the most common form of collateral.
EquiLend, which solved many of the failed trades problems and facilitated higher trading volumes trading thanks to its “Autoborrow” facilities.
The launch of eSecLending with its auction model, as I recall an invention of a fund manager of CalPERS who liked Ebay.
DataExplorers (now part of IHS Markit), founded by Mark Faulkner & Charlie Stopford-Sackville, a duo known for appearing at industry events wearing slippers. It gave us the first real insight in the size of the market and rates down to a single security level. Pre-SFTR transparency. How could we trade these days without it?
All in all, a very nice entrepreneurial, relationship-driven business and completely off the radar activity with an overall market size of about $4 trillion globally at its peak. And then the crisis came…
Then securities lending definitely appeared on the radar of regulators, who have presented us with a whole range of directives and rules to control the intrinsic risks of companies dealing with other companies. We saw a huge rise of the involvement of non-business functions and people such as compliance, risk managers, collateral managers, internal auditors, business managers, etc, etc. The overall business itself has also shrunk considerably to about EUR 2.3 trillion in outstanding securities loans today, due largely to many hedge funds going out of business in the crisis and changes in bank regulation that, affected balance sheet management and proprietary trading. The current agenda seems to be less about looking for opportunities in order to grow revenues and more about CSDR, UMR and let's not forget, SFTR. Maybe this is also because our business has become mature over time, but I hear quite a lot that securities lending is a bit, how should I say it, “boring” these days. On the other hand, the financial industry in general should perhaps be boring, as it is usually the safer option.
But we are slowly seeing light at the end of the tunnel with SFTR going live in the coming months. UMR will have less of a direct impact on securities lending, since everyone trading under an ISDA, must already deal with margin requirements. CSDR is more an issue of increasing efficiency, rather than a completely new process, so maybe IT budgets and product development resources will become available again to support business ideas, rather than for the implementation of regulatory driven mandatory processes. Time will tell.
Other new exciting initiatives have also come to light. Sharegain for example, which allows a route to market for non-institutional investors like private banking clients or family offices. Or Asterisk Networks, which provides a peer-to-peer trading platform, cutting out the middlemen such as lending-agents or broker-dealers. Also, many of the largest and most sophisticated members of the beneficial owner community are already having to deal with a variety of collateral requirements, and the universe of investors captured by UMR will expand over the coming years. This might trigger the need for some sort of new collateral transformation function, which in itself also would create revenue opportunities.
The environment that existed in the 90’s will probably never come back and that is probably appropriate. The freedom to create and execute trades back then was unprecedented. For quite a long time, securities finance could exist in an almost hidden niche as part of the financial industry. Those heady days are long gone. Organisations and regulators want transparency and through SFTR they will get just that. Nevertheless, business opportunities are still there for those organisations that are going to put revenue ambitions (or cost efficiencies) high on the agenda again.
At Pierpoint, we apply the entrepreneurial legacy of securities finance innovation to meet the revenue and efficiency goals of our clients. Of course, just as it began for me, don’t forget training and education – learn from the people who have “been there, done that”.
This is our final blog post of 2019, returning on 7 January 2020. The team at Pierpoint wish everyone Happy Holidays and a joyous, healthy and prosperous 2020!