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opportunities missed due to not having a CRA rating. Principals can select and monitor new and issue that will not go away. The frustrations of the 2006 regulation in Europe will prove a catalyst for change and
Ironically, one could argue that lending to “peers” may existing counterparts (e.g. hitherto unrated broker Agency Lending Disclosure (ALD) process need to be bring much needed transparency - a new era of European
in fact reduce counterpart credit risk as the chart dealers or “peers’) addressed and the forthcoming 2020 Securities Finance ALD is around the corner. New, alternative credit datasets
below demonstrates. Transaction Reporting (SFTR) regime will further challenge will help Securities Finance market participants make
Agents can increase reporting transparency to an already stretched credit infrastructure. The SFTR these processes more automated and efficient.
Indemnification or Insurance: Securities Finance Beneficial Owners and better understand risk
participants could also insist upon receiving an adjusted returns Fig 15 - Example of available consensus data spread for mutual and hedge funds
indemnification or insurance policy from their agent
lenders. This is not without financial and capital cost The borrowers can manage capital and Risk Weighted
and will potentially negatively impact their earning Assets (RWAs) more accurately
potential, alongside the capital and cost implications 8000
for the indemnity provider. This approach might help All parties comply with forthcoming regulatory reporting
reduce the level of risk but could be considered to requirements at time of trading
be “using a sledge hammer to crack a nut”. Market
standard documentation, and liquid collateral held in Across the market enjoy better informed resource
a Triparty account with a positive margin marked to allocation and financing decisions
market daily should theoretically supplant the need
for an insurance policy. Some of the larger more New, complementary data sources are now available,
sophisticated lenders have taken the decision to not providing credit data coverage on funds – from sovereign
require indemnification at all. wealth funds to hedge funds via mutual funds, insurance
funds, pension funds, and others. Extensive data is also
There is an alternative solution to this problem. Securities available on Custodians and sub-custodians, Prime
Finance market participants including beneficial owners, Brokers and subsidiaries, Broker Dealers and subsidiaries,
0
agents, and principal borrowers can leverage alternative Indemnification Providers, CCPs, and Exchanges.
aaa aa+ aa aa- a+ a a- bbb+ bbb bbb- bb+ bb bb- b+ b b- ccc
consensus datasets to improve business performance,
Total: 20,154 Mutual Funds
save capital and increase efficiency. Some of the The challenge of reviewing and onboarding large numbers
additional benefits of this approach include: of funds that are unrated by the CRAs is a major resource
Fig 14 - Consensus data - average credit quality of unrated ‘peers’ versus broker dealers
800
aa
a+ a+ a+ a+ a+ a+ a+ a+ a+ a+ a+ a+ aa- aa-
aa-
a+
a
a- a- a- a- a- a- a- a- a- a- a- a- a- a-
a- 0
May 18 Jun 18 Jul 18 Aug 18 Sep 18 Oct 18 Nov 18 Dec 18 Jan 19 Feb 19 Mar 19 Apr 19 May 19 Jun19 aaa aa+ aa aa- a+ a a- bbb+ bbb bbb- bb+ bb bb- b+ b b- ccc
Total: 2,295 Hedge Funds
Broker Dealers (Bank Entities) Peers (Pension Plans and Sovereign Wealth Funds)
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