Data Explorers would like to thank all the attendees and sponsors of the London Securities Financing Forum 2012. Please find attached the voting results from the day and also the presentation.

Voting Results

Presentation

Register for 2013

London Securities Lending Forum – debate highlights

A packed room in London’s Kings Place was once again the setting for our Securities Financing Forum, hosted for the first time by Bloomberg TV’s Maryam Nemazee who fired some pointed questions to the audience to kick off the interactive voting.

The Euro area is not out the woods yet. It is in the throes of a transition from an acute phase, akin to a heart attack (typified by a lack of funding for sovereigns and banks) to a chronic phase of real adjustment. This analogy was presented by David Mackie, Head of Western European Economic Research at JP Morgan. He warned this transition is dependent on several factors, not least the ECB continuing to be supportive and any Euro area recession being mild. The danger lies in not enough adjustment taking place, if countries fail to meet their budget constraints and the stipulations of the fiscal compact, the stress amongst the Euro-zone could be compounded. However, the ECB has bought quite a lot of time (8 years or so) as long as confidence doesn’t worsen.

These sobering thoughts provided the backdrop for the morning’s highlight panel debate. Our new Superpanel brought together all the elements of the securities financing continuum: beneficial owners, agent lenders, prime brokers and hedge funds to consider how this industry can better cope with the environment that we operate in and open up the shadow banking universe.

Almost 40% of the audience said that Beneficial Owners are in the diving seat, holding the power in securities lending flow, yet a quarter believed the ultimate borrowers, the hedge funds, held the cards. The Beneficial Owners on the panel agreed, but added that regulation coming down the pipe is really calling the shots. For context, we were reminded that securities lending is not high on the priority list for Beneficial Owners, but it’s definitely worth the effort. Today, Beneficial Owners are still focused on risk control and management, yet return generation and corporate governance are also considered.

On an encouraging note, 70% of the audience voters expected supply would remain the same or increase this year. Barriers are falling down. Every hedge fund is increasing their focus on stock borrowing and financing but one prime broker noted that more skills are required in equity finance.

Collateral management services are increasingly important post-Lehman amid demand from the beneficial owners to protect the collateral they receive and get better comfort. Yet, Paul Wilson of JP Morgan poured some cold water of talk about collateral upgrade trades, noting that not many are doing it today. One Beneficial Owner highlighted the need to be compensated for the risk they are asked to take in lending their safe Government assets. Yet we heard the train will rumble on, with increased demand for higher quality collateral set to be fueled by new BASEL and UCITS regulation.

There is too much asymmetrical risk sitting on the balance sheet in the securities lending flow and we don’t see this in the fixed income market, according to Jean-Paul Musicco of Trading Apps (ex of SAC) – and this kicked off a lively debate about the need for a central counterpart in securities lending.

One of the Beneficial Owners said that if a CCP can prove it can add value, it must be considered, but he was not pushing for it. Of course, the driver for change could come from regulators, but panelists asked whether they are confusing CCPs with trade repositories. We heard that with one counterpart there is too much risk and the current indemnification process has stood up in the past and works well today. CCPs have no central bank backup. They are a “mutualization of risk which could be the stem of the next financial crisis”!

At the time, you could feel the tension on the panel and all that was missing was a regulator!

London Forum - afternoon update

Turkeys don’t exactly advocate for Christmas, but the Securities Lending industry needs to engage with regulators to try to protect its business. We need to learn how to adapt if we are to survive the regulatory onslaught. This was the incisive conclusion reached by our keynote at the Forum, Anthony Hilton of the Evening Standard, who is now commentating on his seventh financial crisis. Regulators promise change to make sure meltdowns never happen again, but they always do. They are now fretting about the inter-connectivity across the whole financial system, which they believe increases the likelihood of contagion, and therefore seek to stem through increased regulation. Shadow banking, and securities lending within that, will fall under the spotlight simply because - as Anthony summed it up - it quacks like a bank and will be regulated like a bank.

Our Hedge Fund panel was one of the liveliest panels of the day. While Hedge Funds have traditionally outperformed equities by 60-70%, last year they underperformed by around 4-5%, according to our moderator, Neil Wilson, of Hedge Fund Intelligence. Having said that, there was a wide dispersion of performance, with some funds doing much better than strategies like long/short equity or fundamentals.

We heard from Barclays Capital that their Global Macro Survey saw equities forecast to perform very well this year, with lower correlation figures pointing to a better outlook for fundamentally driven hedge funds. Risk on, risk off seems less relevant in today’s climate and volatility is also lower, which is good for some hedge fund strategies. But, subdued M&A is not good for event driven hedge funds and arbitrage opportunities around convertible bond issuance are limited.

However, former hedge fund manager and author, Eli Lederman warned that in reality, everything unwinds very fast when things go wrong and Andre Stern of Oxford Asset Management said he and his market neutral team go to battle every day with surprises.

We also heard that, on a like for like basis, leverage may have picked up slightly, but it depends on the hedge fund strategy. In the fundamental space, the panel agreed it is very hard to generate alpha in single stock names. Hedging is more like a Beta approach rather than support for Alpha generation.

ETFs came under the spotlight. Alan Miller of ETF provider, SCM Private, admitted that shorting used to scare him when he was managing a hedge fund, but together with Deborah Fuhr of ETF Global Insight, stressed how ETFs offer a lower cost alternative to active funds. Others countered that ETFs were just another product and they were more concerned with returns, stressing the need to look beyond the headlines. A prime broker warned about the incredible proliferation of ETFs and behind the scenes, there are incentives to create more and more products that can impact liquidity.

Finally, we heard that having proper counterparty documentation can be more valuable than having multiple counterparties. Yet the decision for single or multi-prime brokers is very fund specific and depends on how much a hedge fund churns its portfolio and the extent of market exposure.