Securities lending: A buy-side trader’s perspective

Securities lending: A buy-side trader’s perspective

Andrew Neil spoke to Simon Chiocci, a securities lending and borrowing trader at Natixis Asset Management Finance to get his thoughts on the market.

What are your daily responsibilities as a SLB trader?

In my role as a securities lending trader I am a member of our outsourced dealing desk (Natixis Asset Management Finance) that caters to the needs of both internal and external clients. Our structure operates with a banking license and therefore enables our clients to benefit from our principal model which presents several advantages such as, one contract, one margin call, reduced operational cost and risk, only one booking and limit for our counterparties which increases our borrowing facility. For customers wishing to face the street we can also trade as an agent.

As a trader my responsibilities are to optimize the positions of our clients within predefined guidelines. To attain the best outcome we have cultivated strong relationships with counterparties, and maintain our finger on the market pulse and continuously explore new solutions. The daily priorities are checking news in the market, interacting with counterparties to implement trades, check and follow our limits and make sure our electronic platform is delivering value.

Can you outline your current trading approach & objectives?

On the desk we trade equities, bonds and convertible bonds. The objective is to maximize revenue for our customers, to do so we always make sure the most attractive securities are lent. As of today we only trade versus cash collateral but we will be able to trade versus securities through a tri-party arrangement this semester. With this new infrastructure we will be able to diversify our collateral allowance and increase our distribution capability for our customers. Also we will be able to offer more specific trades such as collateral upgrades or repo facilities. Moreover, to capture more borrowing demand we have been increasing the number of counterparties, especially some which we have good relationships with.

Which securities have seen high demand?

With the European Central Bank’s (ECB) quantitative easing demand for securities has been high. Due to volume Govies have been our largest revenue contributor. At a more specific level corporate bonds and equities such as Telit, Fingerprint, Sharp or Vallourec presented attractive opportunities.

How has technology made a difference to your program in recent years?

Our trading activity on EquiLend & BondLend has increased sharply over the last three years and we really value the platform’s capabilities. Therefore we were one of the first to be live on Next Generation Trading (NGT). Thanks to NGT we have been able to change our way of trading by populating general collateral (GC) rates rather than have a fixed GC rate. It has been great improvement in automation and traders have been able to dedicated their time to more specific trades. Currently we are live on “Targeted Availability” with a few counterparties. We will continue to improve our TA and our connectivity with our counterparties because we think it’s the cornerstone of what we do.

SFTR reporting seems to be a concern for the industry. What’s been your approach so far?

Like the industry we think this new regulation will have an important operational cost. Within our group we are following the topic on both fronts - a traditional approach using a provider to be compliant and a more research and development (R&D) approach. From an R&D perspective, within the French Blockchain consortium LaBChain, we are exploring with CNP Assurance, Amundi, Crédit Agricole CIB, Société Général CIB, La Caisse des Dépôts, Natixis and the French Blockchain start up Belem the use of this technology to answer regulatory requirements.

What other regulations are impacting your business?

All the regulations impacting banks and insurance companies such as Basel III or Solvency II have a great impact on our activity.  Basel III puts increased pressure on banks’ balance sheet and limits therefore borrowing capabilities on repo or securities lending structures. We are working with our banks counterparties to find news solutions but our clients are also very regulated and it’s hard to find trade structures that suit everyone. Solvency II has also changed our way of working with our Insurance companies customers. For instance on collateral upgrade trades we take into account the Solvency Capital Requirement (SCR) cost of the structure.

If you could identify one area where the securities lending/borrowing industry could do more what would it be?

We think SBL and repo lacks pricing transparency. Greater transparency could reassure some asset holders and increase the quantity of available securities in the market and increase general liquidity which is a big concern for everyone across numerous markets, including government bonds and credit etc.

Based in Paris, Simon Chiocci is a securities lending and borrowing trader at Natixis Asset Management Finance.

Laurent Albert, head of trading, Natixis Asset Management Finance, also contributed to this article.