Making business decisions essentially involves gathering information, weighing the related costs and benefits and then deciding how to act. The same process applies irrespective of the decision being made. However the clarity of the proposition and the benefits accruing assist the making of decisions.
There are two key challenges facing the proponents of Central Counterpart(ies) in the securities lending business.
Firstly, the need to make their proposition clear and understandable to a target audience that is unfamiliar with the concept. This is despite many of their organisations having extensive experience in other fields e.g. The Depository Trust & Clearing Corporation’s (DTCC) Fixed Income Clearing Corporation (FICC) subsidiary for the U.S. government securities marketplace.
Secondly, advocates need to communicate the benefits to the industry whilst understanding that they do not accrue equally to all participants and are less obvious to Agents and their underlying counterparts.
Meeting these challenges is not helped by a tendency to commingle price discovery, risk management and capital savings into one message.
Regulations are assisting the making of the “cost benefit analysis” argument, although the protagonists cannot rely upon a regulatory driven compulsion to establish a Central Counterpart – a fear expressed at the SEC Roundtable in September 2009.
So the challenges are obvious even though the argument in favour might not yet be. We look forward to seeing when (not if) the penny will drop and who the victors and beneficiaries will be.
