SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

CHALLENGES & OPPORTUNITIES

3.3.

Operational efficiency and transparency

Operational efficiency is an increasingly significant contributor to overall fund performance.

3.3.1

Clearing and settlement challenges

If operational risk is inherent in any financial activity, it is of particular importance in the case of securities loans and repos. Indeed, these transactions involve complex operational activities, especially when conducting business in foreign markets, whether because they are low automated or because they have fragmented securities clearing and settlement infrastructures. As mentioned in section 2.3., the majority of transactions are still performed out of electronic trading platforms and CCPs. Ensuring effective and timely settlements is a challenge in securities lending and repo mar- kets. Yet, failed trades are not uncommon in securities lending markets, especially on re- calls in cross-border transactions. The fragmentation of the securities clearing and settlement infrastructures in Europe remains a core issue because of the difficulty of mobilising collateral held in domestic CSDs for financing purposes when settlement procedures and timetables remain dif- ferent between markets. As long as settlement remains fragmented, transfers between separate systems will remain more complex and therefore more expensive than domestic transfers. It should be noted that the ICMA’s European Repo Council has recently released a white paper on the operation of the European repo market, the problem of settlement failures and the need for reform of the market infrastructure. This paper, which pays particular attention to fails in repo settlement, sets out the fundamental nature of the barriers to effective clear- ing and settlement of repo transactions and proposes solutions and recommendations for creating a robust European infrastructure 26 . Securities lending and repo business also implies working with a broad range of counter- parts, processing and checking transactions, managing efficiently cash and/or securities collateral with frequent margin calls or substitution of collateral, reinvesting cash collateral to enhance returns, being able to recall securities on time to avoid buy-ins, processing cor- porate actions and income collection, allocating lending revenues, measuring exposures and risks. The increased interest of beneficial owners to customise their lending programs under de- fined parameters such as restrictions on markets, portfolios and asset types as well as authorisation of borrowers and collateral options, makes it even more difficult from an op- erational viewpoint and impossible to fully automate processes. Other operational challenges

3.3.2

26 Source : ICMA, “A white paper on the operation of the European repo market, the role of short-selling, the problem of settlement failures and the need for reform of the market infrastructure”, 13 July 2010

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