Future regulations — and the uncertainty of what they would impose on securities lending providers — were front and center in discussions at the Information Management Network Beneficial Owners' International Securities Lending Conference in Austin, Texas, Jan. 27-29.
While topics ranged from the future of securities lending in general to specifics on new strategies and collateral changes, regulatory concerns were the starting points for most of the panel discussions.
“Regulations will change the industry,” said Craig Starble, CEO of ESecLending, Boston. “The industry must move collaboratively to create new products and partnerships” to work together to adapt to new regulations, whatever they may end up looking like, he said. “We're almost there.”
“There” is a place with finalized and specific U.S and international regulations governing two broad areas related to securities lending: shadow banking and investor protection.
Theresa Hajost, special counsel, trading practices, at the Securities and Exchange Commission, Washington, said while regulations from the Volcker rule are in effect and the agency has said it would apply Basel III policy recommendations, other transparency regulations related to the Dodd-Frank Wall Street Reform and Consumer Protection Act are in the comment stage and recommendations from the Group of 20's Financial Stability Board. “The SEC and other jurisdictions may or may not implement them,” she said.
Bruce McDougal, director, regulatory strategies for securities lending at BlackRock Inc., New York, said shadow banking issues include leverage and credit ratio limits and collateral requirements, while investor protection rules are centered on increasing transparency and disclosure from parties like broker-dealers.
Those broad themes can already provide a framework for securities lending firms to develop new strategies beyond more traditional money market funds and cash, including the development of alternative collateral, equity repurchase agreements and mortgage-backed securities, panelists said.
“Regulations will change the traditional model of securities lending, but they also will open our minds to try new things,” said William Smith, managing director, securities lending, at J.P. Morgan Worldwide Securities Services, New York. “And there'll be more agent responsibility to bring new strategies to clients.”
Institutional clients already have shown interest in securities lending with exchange-traded funds, said Jason Peter Strofs, managing director at BlackRock, adding that such strategies provide both beta and alpha. Also, Paul Lynch, chief operating officer of eSecLending, said clients are interested in the “intrinsic value” of exchange-traded funds' short-selling opportunities.
Another concern panelists raised was whether regulatory agencies will coordinate their final rules, as the SEC has done with Basel III recommendations. “Hopefully, there'll be consistency in other rules across agencies,” said Kristin Missil, senior vice president and head of securities lending risk management at Northern Trust Corp., Chicago.
While some panel participants expressed frustration with the pace of regulatory implementation, they do see a light at the end of the tunnel.
“We're getting to the point where rules that have been up in the air are finally being put in place,” said Judith Polzer, head of securities lending at J.P. Morgan Worldwide Securities Services, New York. “You may not like them, but at least you'll know what they are.”
