SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

MAIN PLAYERS AND ARRANGEMENTS

After the 2007-2008 crisis, regulators have been keen to see CCPs taking on an increasing role in the repo and securities lending markets, as in other financial markets such as OTC deriva- tives, considering that the CCP model offers a relative transparency compared to OTC products. However, the market participants overall, both lenders and borrowers, remain strongly reluctant to such an initiative. If they agree to support any initiative to increase efficiency and reduce risk, they argue that simply shifting the risk to another party (the CCP) does not necessarily mean reduced risk. Furthermore, there are many types of assets used in repos and securities lending and managing multiple risks across a wide range of financial products may diminish CCP ef- fectiveness. They also argue that CCP will need to gain very specific expertise for these markets and that access to CCP services may include membership requirements, which could represent a barrier of entry for some categories of market players and could inhibit market growth 18 . Last but not least, the non-standardisation of securities lending and collateral management pro- grams is a significant barrier for central counterparties. If a CCP brings risk mitigation benefits, it could also bring complications from an operational perspective. Where central counterparties have been successful in others markets, those markets have not had the lifecycle complications of securities finance, say some industry players 19 . In the future, CCPswill definitively have to develop a thorough understanding frommarket partic- ipants – especially prime brokers and agent lenders-, as to how this model will work in practice and in identifying the inherent risks within the context of a securities lending and repo environ- ment, if they want to truly become successful.

18 Source: Euroclear, “Steering a new course for the repo market”, 2010 19 Source: Investor Services Journal, “Securities lending market guide 2010”, 2010

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