Out of the Dark Ages
Clearing Quarterly and Directory, March 19, 2008
These firms have platforms that might represent an "embryonic" securities lending exchange, the report says. If one of them were to go forward with a CCP, it would "spur tremendous development or liquidity in securities lending," the report says.
SunGard and EquiLend, Galper wrote, have the best built- in trading controls to prevent a borrower from taking positions the lender believes are too large. Which one would be the best model for a securities lending exchange?
"EquiLend is in fact the obvious choice for this type of global market utility," he writes. But Galper also says that SunGard's Loanet Centralized Order Routing (LICOR) utility is similar to EquiLend's product.
"The primary differences are that EquiLend bundles all of its products together at tiered price points while SunGard offers its services on a base rate per ticket basis, and that SunGard can maintain full books and records for clients," according to the Vodia Group report.
Whichever model or models are successful, lenders and borrowers agree that securities lending is a fraction of what it could be if borrowers and lenders had more confidence in the rules of the game. The consultant Celent, in a recent study of securities lending, estimates total global lendable assets are some $16 trillion. But the amount lent is some $3.6 trillion, Celent says.
A Growing Business
Still, Celent projects that securities lending in the United States, despite its problems, will still grow by only about 5 percent a year over the next few years, about half of the projected European growth rate.
Despite its problems in the United States, securities lending has already begun to become a more prominent business at many securities firms, according to industry observers. But more electronic trading platforms and more CCPs would help expedite the growth of the untapped business, just as Nasdaq's growth from a utility to a formal exchange promoted OTC equity trading, say industry observers.
The basic idea of a central credit counterparty (CCP) is that it becomes a buyer to every seller and a seller to every buyer. The CCP is a middleman, taking on the risk in every transaction. It ensures the creditworthiness of all parties. Therefore, an effective CCP would greatly reduce trading costs, generate uniform credit risks and offer anonymous securities lending trading.
Nevertheless, ICAP's Zummerhansl says that while a CCP could reduce dealer-to-dealer concerns about credit worthiness, the bigger issue is ensuring that an electronic platform has the greatest reach of potential trading parties.
Critics of the current securities lending markets say that information now is highly concentrated in the hands of a relatively small number of people. That means few screens on which prices are displayed. It also means fewer places where one can get more than an indicative quote.
Right now the system has some big winners. For example, prime brokers, which often act as middlemen between the owners of a stock and the borrower, now reap huge revenues from this line. Securities lending can be a very profitable if one owns certain kinds of lendable stock or for a middleman who knows how to use the spread.
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