Lively debate amid expert insight: a recap of the New York Securities Financing Forum
The leading practitioners and thought leaders in securities lending gathered today at the Four Seasons in New York City, where it was standing room only as over 200 hedge funds, prime brokers, agent lenders, beneficial owners, regulators and media packed the conference room. Following are the key takeaways from each panel:
The Future of Securities Financing
The challenge when discussing how things like Dodd Frank will affect this industry is to avoid leaving the impression that these changes will make business more difficult full stop and the majority of attendees (54%) admitted they are “a little” worried about short selling disclosure regulations impacting their business in a negative way. Most attendees think that US real time reporting of short positions will most impact lending demand.
Anticipated regulatory changes are limited in the overall scale, given that most of Dodd Frank is not about securities financing. With an aspect of Dodd Frank about to go into effect, rules around swap transactions are remarkable given that nobody really knows where they are going to book transactions – many of the vehicles they’re currently using will be unusable as regulations go into effect, and there is no clear explanation from regulators yet, as to what to do come July 16th. The major takeaway from this discussion is that when designing laws, the regulators would do well to bear in mind how the traders are going to react. They may start unwinding positions sooner, having learned from the Bear/Lehman crisis. With the current proposals, traders are likely to simply not trade if the rules are not altered. Read more: http://www.dataexplorers.com/news-and-analysis/ny-securities-financing-forum-what-effect-will-current-regulatory-changes-have-sec.
Q&A Quant - "The long and the short of it"
Rochester “Rocky” Cahan, VP of Deutsche Bank’s Global Equity Quantitative Strategy team kicked off the Forum’s hedge fund session with a presentation and Q&A around the team’s recent report: Signal Processing: The long and the short of it.
The results of the study are robust and provide independent evidence that there are profitable trading signals in securities lending and short interest data, primarily daily, global short interest data from Data Explorers.
“There is value in this data for long short investors, but what’s often missed is that there’s value for long only managers. Going underweight securities heavily borrowed does generate some alpha,” said Mr. Cahill.Read more:http://www.dataexplorers.com/news-and-analysis/ny-securities-financing-forum-qa-quant-long-and-short-it.
Hedge funds – In a difficult environment how can the securities financing industry best serve their needs?
The SEC investigations into insider trading and the Galleon case are clearly emboldening compliance departments to put the brakes on public engagement – a challenge in trying to build a panel aimed at understanding what the hedge funds want from their prime brokers. Fortunately there are masses of top tier hedge funds in the audience who have had the opportunity to express their views through our anonymous interactive voting handsets:
The majority of the audience was split as to what they thought the average hedge fund leverage ratio is at present, with 38% saying 1-2 times, and 38% saying 2-3 times. 63% of the hedge fund audience does not expect that ratio to change over the next 12 months.
When asked about the proportion of supply accounted for by Exclusives, the majority (67%) thought that 10%-25% of the supply is Exclusives.
Twenty-five percent of the hedge funds polled see their Prime Brokers as trading partners, with the remaining majority split as to how they view their PBs: 38% deem them to be trusted partners, and 38% see them first and foremost as service providers.
The panelists see the “partnership” aspect of the Hedge Fund/Prime Brokerage relationship to be key, with credit worthiness remaining very important, even two+ years after the crisis. As one panelist put it, “the temperature has come down a bit, but Prime Brokers must have a structure in place that allows them to get to the most credit worthy entity in their organization. Read more: http://www.dataexplorers.com/news-and-analysis/ny-securities-financing-forum-hedge-funds-%E2%80%93-difficult-environment-how-can-securiti.
Academic presentation - What is the impact of short selling disclosure regulations on investor behavior?
Together with Professor Charles Jones of Columbia University, and Professor William Waller, also of UNC, Professor Adam Read was challenged to uncover the true impact of public short selling disclosures. Their research is based on the UK disclosure regime and we are pleased that Adam has chosen to present his findings for the first time at our Forum.
The market impact study is particularly pertinent ahead of crucial legislation being considered by the European Union and now up for consultation by the SEC. An impartial study on this topic should serve the industry well especially if it shows adverse consequences from naming and shaming short sellers.
Ahead of his discussion, Professor Read polled the audience and uncovered some interesting responses:
Forty-five percent of the audience agreed that there IS evidence of predatory trading among short sellers, with 34% saying there is NOT evidence, and 21% saying they’re unsure.
A resounding 94% of the audience agreed that there IS evidence of “follow the leader” behavior amongst investors.
The professors’ research addresses these same questions. A summary of their findings will be posted shortly at www.dataexplorers.com/newyork, along with a video interview between Professor Adam Reed and Will Duff Gordon of Data Explorer at www.dataexplorers.com/news.
Risk vs. reward - Agency Lending 2 years on
This panel discussed how the agent lenders are faring - braced with the twin threats of demanding beneficial owners on the one side and the balance sheet challenged brokers on the other. Some on the panel, and within the audience, suggested that the funds who lend have unrealistic expectations at present:
44% of the delegates polled think that the risk of beneficial owners is higher compared to a year ago;
32% believe it to be lower;
and 24% think it remains unchanged.
It was proposed by one panelist that there has been such a strong focus on risk, that the pendulum has swung so far that it is extremely hard to match the income expectation given the level of risk that is tolerated. In other words, it’s important that the market work to demystify Beneficial Owners’ perception of risk. Read more: http://www.dataexplorers.com/news-and-analysis/new-york-securities-financing-forum-risk-vs-reward-agency-lending-2-years.
Exchange Traded Funds – Will they be the new driver of securities financing?
The rampant growth of ETFs are central to the securities lending debate, and today’s ETF panel drew much interest in what remains (for some) a still fairly vague topic. The panel opened with a question to the attendees from the Wall Street Journal’s Ari Weinberg as to whether or not a systemic risk is posed by the ability to borrow physically backed ETFs more than the shares in issue, and there was what Will Duff Gordon referred to as “an audible intake of breath” at the results: 46% said that YES, there is systemic risk, 37% said there is NO systemic risk, and 17% said they’re unsure.
When asked how significant potential loss of revenue is to the traditional securities lending agents and direct lending agents by virtue of ETFs creating a lendable pool of assets within the prime brokers, 22% of the audience voted very significant, 46% said significant, 24% simply didn't know, and 9% voted "not relevant."
Clearly not all ETFs are created equal, and yet they all get grouped together, unfairly so, by regulators. The most liquid ETFs bear very little relationship to those tracking esoteric sectors or themes. Read more: http://www.dataexplorers.com/news-and-analysis/ny-securities-financing-forum-exchange-traded-funds-%E2%80%93-will-they-be-new-driver-secu.
Industry leaders – What are the macro factors that will affect the securities financing industry?
Last but not least, a group of industry titans discussed which macro factors will most affect securities financing. With our founder, Mark Faulkner moderating the discussion, it was most certainly entertaining and informative.
To kick things off, Mark polled the audience as to whose business model is going to change the most in the future? The response:
Beneficial owners – 3%
Agent lenders – 43%
Prime brokers – 40%
Hedge funds - 13%
It was clear from the discussion that there are good intentions to remove systemic risk from the market, but as one panelist put it, right now it’s a matter of “road under construction,” when it comes to navigating the myriad regulatory proposals, and this is their number one focus. Models to look at different ramifications of capital requirements or regulatory rules have become commonplace, with “hundreds” people dedicated to understanding implications of the Orderly Liquidation Authority (OLA) and “bridge vehicles.”
"Are indemnities worth it?"
The panel was unclear as to the price and relevance of an indemnification in today’s market. One panelist predicted that the U.S. Agent Lending market could take a leaf out of the book of European and Canadian markets, where non cash collateral is more prevalent and indemnities more straightforward to price. Read more: http://www.dataexplorers.com/news-and-analysis/ny-securities-financing-forum-industry-leaders-%E2%80%93-what-are-macro-factors-will-affec.
