Traders Q&A: Matt Wolfe Discusses Securities Lending

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Are you positive or negative about the prospects of the securities lending market this year? Why?

Positive. We have experienced continued growth over the last several years. In 2017 we saw cleared stock loan volume at OCC increase 22 percent from 2016, and we expect to see that continue in 2018 as we work to enhance our program and add participants. We are working to include product enhancements as well as expanding OCC's membership criteria to support a broader set of lenders. It seems that the investments made across the industry in order to better understand and manage the capital and balance sheet costs of transactions are showing benefits. It also appears that the industry has adapted to regulatory changes and is now better positioned to understand and identify opportunities. Hopefully that will translate to increased balance sheet allocations and innovative counterparty decisions that will increase both rates and utilization.

Will indemnification continue to be a point of contention for many agent lenders and beneficial owners? Is there a solution?

I think that indemnification will continue to be an important consideration, but I believe that once a CCP solution is available for agent lenders and beneficial owners, indemnification won't be as contentious for cleared loans. When beneficial owners and agent lenders are able to clear their transactions, the counterparty becomes a systemically important central counterparty, such as OCC, with an S&P rating of AA+, and a robust and transparent risk management practice. That should significantly reduce the cost of capital and the amount of capital needed to provide indemnification. Or perhaps someday indemnification will be dropped altogether since the CCP's function is to provide a guarantee to the lender against any loss should there be a default by their borrower.

Will 2018 be the year CCPs finally get a foothold in the market?

As the only U.S. CCP and largest worldwide for securities lending transactions where return of stock or cash to bi-lateral and exchange-traded stock loan participants is guaranteed, OCC already has a foothold in the securities lending market with over $75 billion in loans being cleared. This year marks the 25th anniversary of the launch of our clearing program, but access has been limited. We are currently working on expanding our model to better accommodate the buy-side through various enhancements and are very much looking forward to expanding our footprint and level of service to the securities lending market.

Is the U.S. market likely to see any major reforms to regulation effecting securities financing (e.g. Dodd Frank) this year?

The regulatory changes implemented over the last few years have resulted in a more resilient financial services industry. I haven't heard of any major reforms that are in the works related to securities lending. And I would not be surprised to see an initiative in the U.S. similar to Securities Financing Transactions Regulations in order to better equip regulators with data to enable them to monitor and fine-tune requirements. My hope for 2018 is to enable more of the market to realize the capital efficiencies and costs savings that are afforded to clearing within the current regulations.

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