Jumping through Hoops
Tully, Kathryn, Global Finance
In the hunt for demand and revenue, securities lending in emerging markets sounds perfect, but big obstacles still curtail liquidity.
Faced with falling demand and tighter regulation in North America and Europe, securities lenders and agent banks, you might think, would all be looking to emerging markets to boost revenues.Yet even in crucial BRIC economies, which boast both the demand and regulatory framework to enable offshore securities lending, there are still significant barriers to entry.
John Arnesen, global head of securities lending at BNP Paribas Securities Services, says that although Brazil and India are of interest to securities lenders because of the size of their economies, liquidity is limited and there is little offshore activity. "India, for example, has loosened restrictions and now allows loans of three months instead of one month, yet if you look at conventional transactions from an off-shore agent lender to a borrower, the volume is tiny." One obstacle to faster offshore development is that both countries operate central clearing counterparty models, where collateral received for lent securities is held by the national exchange, not by the agent. "Because this isn't a familiar model, clients are less interested in those markets and agent lenders have less impetus to operate there. Markets that use central counterparty clearing houses will continue to suffer from lower liquidity, unless the fees are so lucrative that agent lenders address some of these barriers to entry."
By contrast, markets such as Poland, South Africa and Turkey, with established over-the-counter securities lending structures, will continue to attract liquidity, according to Arneson: "In Poland and South Africa, more lucrative yield-enhancing structures are possible, and in all three there is borrower demand derived from directional shorting and capital-raising. …