Section 2 - FTSE

THE SECURITIES LENDING ROUNDTABLE
68
130/30 space with more
active participation of the
front office in what has
been a largely back office
business for many clients.
Those are the things to
look out for next year.
CJ: There is certainly more
scrutiny from a regulatory
perspective. In the coming
months we will see more
on MiFiD and best
execution and Beneficial
Owners are expecting more
transparency in their
programs. From a client
perspective, more
beneficial owners want to
see where returns are being
generated from, what risks
they are taking to generate
returns, and want to ensure that earnings are being allocated
appropriately and not subsidising other accounts.
MICK CHADWICK, head of trading, securities finance, Morley Fund
Management
JP: For us the next 12 to 18 months, the important areas will
be assistance in helping us come up with products that
allow us to take full advantage of the new UCITs III
freedoms, in particular allowing us to find efficient ways of
financing short trading. In the very short term what we
don’t want to see is for one result of the current liquidity
crisis to be a blow up in someone’s lending programme,
especially on the reinvestment side, which causes fear
across the lending industry generally. Lending really is
relatively safe.
DR: I agree with some of that and certainly one of the
things I want to do with ISLA is to make people outside
the industry understand the importance of the industry to
the capital markets, because I don’t think it is widely
understood by regulators, central bankers, chief
executives, and so on. The risk to the industry is that for
most beneficial owners stock lending is no 59 in their list
of things that they care about. Nonetheless, the
importance of well-functioning stock lending markets to
wider market liquidity has grown significantly over the
last decade? in particular with the growth of the
derivatives markets, the expansion of hedge funds and
the changes in banks’ balance sheets. The stock lending
industry has come out of the recent market turbulence
with a good story to tell. Lending volumes actually grew
and that helped to sustain liquidity in the repo markets
and the cash bond and equity markets. More narrowly on
what regulation is coming up in Europe, Basel II is going
to be a big change, particularly for the dealers, in the way
that they are going to have to calculate their capital on
stock loans, they will have to get granular information on
their exposure to each
underlying principal from
the agent lenders and they
will have to credit assess
all those principals. ISLA
will be doing work to
facilitate that disclosure
from the agent lenders and
we will be planning a
survey of the industry in
the next few weeks.
MF: Eighty percent of the
revenue in this industry
comes from emerged
markets and that the bulk
of the energy of the
industry will be consumed
in making those markets
more efficient and to grow
those and get more
supply. Battle lines are
increasingly drawn between the prime brokers and the
custodians who want to be prime brokers and this will
be interesting to see play out, and the extent to which
they park tanks on each other’s lawns. I actually think
performance attribution will be the next big thing. Much
like they choose an asset manager, beneficial owners will
ask “How do you do it?” and everyone will have to
articulate where the money comes from. The buzz is
about optimisation, not maximisation. I also think this
mark to market issue is huge, and Richard mentioned
quarter end. It will be an interesting end of the year, but
I do predict that there will be a major M&A event next
year in the banking world that at its core will have
finance as its logic.
MC: In terms of the growth and development of the industry,
it may sound prosaic but I see more of the same. In mature
markets there will be increased volume accompanied by the
automation necessary to handle that volume. Across all
markets I see increasing convergence between synthetic and
traditional lending, given that they are driven by the same
goal. As far as the overall industry landscape is concerned,
within the fund management sector there will be an
increasing recognition that securities finance is very much a
front office discipline. My own background is on the sell
side. Back when I started there, securities finance was
regarded as a quasi back office function. Now, securities
finance and prime brokerage sits at the heart of an
investment bank’s dealing operation. For most fund
managers it will never be as core as that- unless a fund needs
to use leverage, securities finance will remain a ‘bolt-on’yield
enhancement strategy. However, given the competitiveness
of the industry, the revenue contribution from this activity
will become ever more important, and it will attract
appropriate management time and attention as a result.
NOVEMBER/DECEMBER 2007 • FTSE GLOBAL MARKETS