Securities lending under the spotlight
To get a sense of what 2012 has in store for market participants, we caught up with JP Morgan’s Paul Wilson to discuss some of the themes that will be debated at our London Forum on the 20th March. Issues covered ranged from Shadow Banking, central counterparts, the proposed European Financial Transaction Tax, the different approaches lenders are taking in terms of their collateral risk profile and an acceptable return from securities lending.
First up, we addressed the great deal of attention that ‘Shadow Banking’ has been receiving as people become aware of how this market is providing cash to the system to make up for the gridlock in the inter-bank lending world. To those who worry that insurance companies are blindly swapping good assets for bad ones, Paul articulated how carefully people are entering into these trades. A certain slice of asset owners pay very close attention to understanding the assets they are being offered as collateral and work with their Custodian to make sure these trades adequately protect and reward them. It is increasingly possible to extract a higher margin, a shorter term commitment and higher fees to offset the risk.
A Central Counterpart, in the hope of regulators, would lessen systemic and counterpart risk. Paul said this might not be true and that there was a serious chance that such a push could drive more asset owners away from securities lending. With revenue hard to come by from this activity, any further complexity or cost might well tip the balance against the business being worth the effort. We look forward to debating this further at the Forum.
By some distance, a Europe wide Financial Transaction Tax would be the most expensive, and not to mention cataclysmic, of the circling regulatory initiatives. (See our prior interview with law firm Cadwallader).
While recognizing that tax harmonization has limited the opportunities for yield enhancement trading, Paul expects this year’s income to be fine. This is partly judged on ‘bellwether’ stock, Siemens, which raised its dividend by 10% compared the last year. There is a new trend whereby some asset owners are asking to only partake in this type of lending.
Finally, there is nothing new in Custodians having different types of lending clients ranging from those with conservative guidelines to those prepared to be more imaginative. What has changed, I suggested, was that the earnings potential of these two groups have never been more polarized given the importance of collateral flexibility in determining the fee. As you will hear if you watch the interview, this is basically correct and Paul describes which types of Beneficial Owner are in which camp.
