European Securities Lending Practitioners Value
Equity Collateral
However, cash is still king in the US; Regulators may need to act
New York and London, 6 May 2010 - Data Explorers, the leading global provider of data and analytics into securities finance and short interest, has today published a research report which established that US domiciled securities lenders are overwhelmingly focussed on cash as collateral, whilst many other jurisdictions have a propensity to accept non-cash collateral. The report argues the predominance of non-cash, in particular liquid equities, collateral by lenders outside the US was instrumental in mitigating risk following the implosion of Lehman Brothers during the credit crunch.
“Collateral is an essential component of securities lending transactions. What one accepts and how it performs is of critical importance, especially when things go wrong, as in the case of Lehman,” said Mark Faulkner, Founder and Head of Innovation, Data Explorers. “The extent to which US regulations continues to encourage a reliance on cash collateral will be a key theme covered at the New York Securities Financing Forum in May.”
The Data Explorers report: Accepting Equities as Collateral: The European Lenders’ Experience was commissioned by the Risk Management Association (RMA) and forms part of its submission to US regulators. The report highlights the overwhelming reliance on cash collateral by US domiciled institutions (see table). This contrasts heavily with other countries, such as the UK, where cash accounts for only 21% of collateral and Canada, which has seen reliance on cash almost half to 20% over a three year period.
“With investor protection at the forefront, US regulators such as the SEC (mutual funds) and the Department of Labor (pension funds) may wish to reflect on positive European experiences to ascertain the potential benefits of adopting international collateral practices,” added Faulkner. “Cash remains an important component of collateral, but we believe it should form part of a balanced portfolio.”
Data Explorers believes that these statistics owe a great deal to historical tax legislation and inertia, yet the predominance of non-cash collateral, such as equities, has served lenders outside the US well during the recent credit crunch.
Survey results from the recent Securities Financing Forum in London anecdotally endorsed this view. Following the Lehman Brothers default, UK and European securities lending respondents revealed that less than 10% saw a loss after collateral was liquidated and lent securities were repurchased, whereas 78% actually ended up with a surplus.
When considering the Lehman Brothers default, the positive experience of European lenders accepting equities as collateral will form a central premise for discussion at the forthcoming Securities Financing Forum on 26 May in New York, attended by over 150 senior representatives from regulators, hedge funds, institutional lenders, prime brokers and lending agents. Anchored for the day by Matt Miller of Bloomberg News, the panel discussions include:
- Should US regulators encourage greater use of cash collateral?
- Greece has just banned short selling - what are regulators doing now in the US?
- ETFs are “hot” - but how “hot” are they in the Securities Finance market?
- Supply still matters - what is the lender appetite for new markets?
· How can providers differentiate themselves in the Securities Finance marketplace?
- Demand may be down, revenues may be falling – how can you make more money?
- Are hedge funds getting what they need from their prime brokers?
For more information about The Securities Financing Forum in New York on 26 May 2010 please visit: www.dataexplorers.com/forums