Extraordinary debate and expert insight: a recap of the London Securities Financing Forum

On March 16th at Kings Place in London, Data Explorers brought together the world’s leading thinkers and practitioners in securities financing for a day of unique insight and powerful inspiration. Visit www.dataexplorers.com/london for editorial coverage from each panel session, photographs of the day, audience polling results and real-time Twitter highlights from the practitioners and media in attendance.
 
Overall, we saw a day of lively debate and expert thought leadership that will no doubt continue at the next Securities Financing Forum in New York, on May 26th: www.dataexplorers.com/newyork.
 
Following are the key takeaways from each panel:
 
The Future of Securities Financing
 
This opening session at the Data Explorers London Securities Financing Forum set the scene for a day of extraordinary debate, as the leading institutions of the securities finance industry debated and predicted what the securities finance landscape will look like in the next 18 months. The panel agreed that there are a large number of pending regulatory changes and possible frameworks being considered.
 
Regulation is still at its formative stage creating uncertainty, with only a fifth of the audience currently devoting up to 20% of their time to regulatory issues. As one panelist contended, the future regulation will be a key business consideration over the next five years, and is something for which everyone should be prepared.
 
The panel also agreed that regulations such as the EU short selling directives are receiving a lot of attention and will continue to do so. Said one speaker on the two contrasting short selling papers to be published by the EU, “If Marilyn Monroe met Albert Einstein she would say, our children would be great with my looks and your brain, in which Einstein may reply what if it works the other way around?”
 
Also discussed was the education of Beneficial Owners, which made for great debate. As one panelist declared, “Beneficial Owners are philosophically engaged,” whilst the FSA argued that they require greater education and transparency.
 
Cash collateral was a topic of discussion in response to data that shows 50% cash collateral is currently in the market. While cash collateral will still be considered an important component, it may be isolated into different pockets, and according to one speaker, may be constrained in the future if there is a greater focus on it.
 
“Signal Processing: The Long and Short of It"
 
This hedge fund panel, hosted by Deutsche Bank whose researchers authored the paper, introduced their securities lending factor, known as the DBSL, which is based on various data points from Data Explorers. Results show that testing of the DBSL provides consistent performance with low portfolio turnover. Read more: www.dataexplorers.com/news-and-analysis/long-and-short-it.
 
Crucial to the discussion was the value of securities lending data for traditional long only managers (not just short sellers), given that short sellers are well versed in predicting stock movements around events and earnings.
 
Hedge Funds – In a difficult environment how can the securities financing industry best serve their needs?
 
This panel presented some interesting views with contrasting opinions. One data point displayed the peaks and troughs of hedge fund launches and showed that newcomers are shying away, with launches remaining at record lows.
 
The panel agreed that the return to historic AUM levels is concentrated to large and established institutions, while smaller funds do not receive much exposure, adding to the issue of capital restraints and a slow turnaround in the industry overall.
 
Sentiment from the panel was less than optimistic towards the statement that performance is set to improve and net inflows are expected to grow at nearly 4 times the amount seen in 2010. One panelist stated that while he is very optimistic, he thinks the hedge fund landscape will remain as it is for some time, particularly since larger funds can “suck up a lot of cash without capacity constraints.” Added another panelist, “unless there is a demand for alternative strategies, the growth estimates are very optimistic.”
 
As for prime brokers, an industry survey showed that 80% of hedge funds think that prime broker creditworthiness is the number one service that the hedge fund industry seeks. Read more on this point: www.dataexplorers.com/news-and-analysis/academic-debate-financial-markets-cannot-function-effectively-without-short-sellin.
 
Academic Debate: Financial markets cannot function effectively without short selling
 
The academics on this panel were asked to consider a perception that short sellers “boost bubbles and then prick the bubble” to profit.
 
Dr. Alessandro Beber of the Amsterdam Business School compared the performance of markets in countries that impose a short selling ban and those that do not, weighing the costs and benefits of short selling and the effects to single stocks. A key finding showed that banning short selling has a detrimental effect on liquidity, and that the negative effect on liquidity is at approximately 25% in countries with a ban. Liquidity problems are seen to be further amplified in small, volatile or non-option stocks.
 
Ekkehar Boehmer, EDHEC Business School, used the daily shorting flow in the US markets to carry out their research, which found short selling accounts for a large proportion of trading activity, 28% in 2008.
 
Perhaps the debate was best summarized by Dr. Pedro Saffi when he opened with, “don’t shoot the short selling messenger!”
 
Risk vs. Reward – a delicate balancing act
 
A combination of Prime Brokers and Custodians on this panel made for a great debate, especially on talk of custodians raising fees and fee split. The discussion was set off when one of the panelists made the key point that “all lending agents are different as they all have different business models and cannot be put into the same basket.” In other words lending agents’ business models need to be evaluated individually.
 
Agent lenders are increasingly competing on price rather than business models. It is understood that margins have been squeezed over the past few years but it is key to look at what is happening in the market and programs must be adjusted accordingly.
 
In determining a fee split, flexibility, risk and rewards and cash reinvestment are some of the key factors that clients are now concerned with, but as one speaker noted, while fee split is an important component, the bottom line is the key point to look at with clients.
 
Read more from this panel: www.dataexplorers.com/news-and-analysis/risk-vs-reward-–-delicate-balancing-act.
 
A star flickers in the dark: will the ETF be the new driver of Securities Financing?
 
Blackrock and Markit statistics show that ETFs have seen growth in the last year, but the ETF is not quite the fire starter with only $60 billion on loan against $3 trillion of securities. That said, the panel agreed that the ETF industry is set continue to grow, with ETFs taking up an increasing proportion of the asset management business. They are optimistic that with 12% of growth going into ETF products, increased competition will lead to consolidation and greater players and products in the industry.
 
The panel also drew comparisons between the U.S. and Europe, with one panelist saying, “There are more than 30 ETFs tracking the Euro Stoxx 50, it’s like choosing from the menu of a Chinese restaurant.”
 
See more from this colorful discussion: www.dataexplorers.com/news-and-analysis/star-flickers-dark-etf-will-it-be-new-driver-securities-financing.