Securities Lending Forum, New York

Last week’s Securities Lending Forum in New York, hosted and organised by Data Explorers with GSL as media partners, covered an impressive breadth of subjects. At this time of the year, with markets rising steadily and the hysteria around short selling and the ‘shadow’ banking system declining, it’s important to keep the momentum going with regard asking the searching questions about the securities lending industry and continue to widen the debate. This was achieved in New York with one particular panel featuring the Federal Reserve and the SEC. These two bodies seemed keen to continue to ‘promote’ the securities lending industry – if you catch the drift in using that term – though there is a sense in which this is the high point of securities lending’s fame, and that it may once again nestle into the machine of capital markets.

One subject touched on by these regulators was the fabled uptick rule. An SEC spokesperson surprisingly admitted there was not a great deal of empirical data to work from in assessing the use of this measure, but what they had showed that – as expected – blocking the buy-backs of short sales until the share price increases is not a useful or sufficient parameter. But – equally as expected – the court to public opinion will inevitably think differently: clamp down on those short sellers, bring out the cotton wool for wary long-only shareholders and ensure regulation is cursed by half measures. So although there was lot of agreement on the panel as to the necessity of keeping channels of communication between securities lending and the regulators, it was clear that a repeat of the talk might make the presence of a politician mandatory – it doesn’t matter if regulators and practitioners are on the same page if politics is reading from a different book.

One important area covered – in the panel ‘Putting the risks and rewards of securities lending into context’ – was the necessity for collateral flexibility. In particular the panel highlighted the use of equities as collateral. The practice is plentiful in countries such as Canada, where some countries do not allow equities collateral. John McIntyre, managing director of securities lending at Prudential Investment Management, pointed out that “intellectually, it makes some sense” to allow equities collateral as it correlates so much better with the stock on loan rather than taking fixed income. But two familiar hurdles stood in the way: regulatory flexibility, and the ability of boardrooms to alter such guidelines as they still seek to hunker down, retain top staff and wait until calmer waters.

The discussion ‘Does this industry get the press it deserves?’ was more of a mixed bag. Dan Wilchins of Thomson Reuters, the moderator, and a panellist from the Financial Times, Anuj Gangahar, put in sterling performances alongside Rob Chiuch of the Canadian Securities lending Association (also CIBC Mellon) and Michael McAuley of RMA. Indeed, the journalists made the best points concerning the mid-point at which journalists and industry professionals need to work together more, that the lending industry in a sense needs to come a little more out of its shell. In this case, journalists should apparently be scouting around near deadline to get confirmation of the ‘picture’ of the industry they are putting across – ‘what might we be missing?’ might be a common question from the journalist. The moderator cited a lot of US based articles that perceived securities lending with suspicion, if not outright criticism. However, I maintain that hedge funds and short selling have still bourn the real brunt of media scrutiny, with the lending part typically a bolt on to the mainstream discussion.

Back on the panel, amid the reaction from the local regulatory bodies, there were hints of the viewpoint that: ‘if you criticise our industry, it is because you don’t fully get it’… certainly not the robust, media confident face that the industry must develop for its own benefit. But the matter was summarised well by Mark Faulkner in an end-of-day round- up with trademark concision: ‘Does this industry get the press it deserves? Yes, so it’s time to work more with the media.’

One relationship that apparently remains as strong as ever is that between hedge funds and prime brokers. Mark Bailey at Merrill Lynch moderated an excellent panel entitled ‘How do hedge funds want the securities financing market to change?’ that included Shawn Sullivan, global head of prime services at Credit Suisse and Alan Pace at Citi among others. As was also mentioned in the last GSL Summit, prime brokers will not be overlooked if a central counterparty model becomes the norm in European markets, but that the range of services that prime brokers had been increasing in the last few years may narrow as the bottom line becomes ever more prominent. “We like our prime brokers,” affirmed Andre Stern of Oxford Asset Management. Interestingly, in an end-of-day set of predictions for the ret of this year, all hedge fund strategies were expected to succeed, except for equity long-short.