Wednesday, October 7, 2020
Securities Financing and Derivatives Markets Interconnections and Potentials for Greater Transactional Efficiencies
I just did a quick read through ISDA’s new whitepaper, Collaboration and Standardization Opportunities in Derivatives and SFT Markets. “SFT” stands for securities financing transactions. I encourage anyone studying these markets to at least review its Executive Summary. As it states “This paper explains and illustrates how and why two large, important and interconnected markets – derivatives and securities financing transactions (SFTs) – could collaborate to achieve greater standardization and improved efficiency.” (p. 3)
It's divided into two parts: 1) an overview of the relevant markets (repo, stock loan, and derivatives), their interconnectedness, and possibilities for and benefits of greater transactional efficiencies, and 2) a proposal for implementing these objectives.
Much of the paper focuses on market interconnections, which strongly argue for the possibility of improved transactional efficiencies. I kept thinking about interconnections from a systemic risk/financial stability perspective, and how (if at all) promoting greater transactional efficiencies (which, at least at first glance, seems like a good idea) might impact such considerations.
I encourage more of us in the banking and financial institutions area to give additional thought to systemic risk and financial stability issues related to securities lending, including due to its interconnections with derivatives markets. For example, while there has been much written about AIG’s CDS problems in the 2007-08 financial crisis, comparatively little work has addressed the securities lending issues it had (for example, see Securities Lending and the Untold Story in the Collapse of AIG). Nevertheless, “Participants in the SFT and derivatives markets have traditionally overlapped. Banks (including investment banks, commercial banks and central banks), prime brokers, funds (including hedge funds, pension funds and sovereign wealth funds) and market infrastructures (such as clearing houses) are among the biggest players in both the derivatives and SFT markets.” (p. 12)
Well, once I finish my article on NCWOL claims for clearinghouse shareholders for the upcoming BLPB Virtual Symposium, maybe I’ll turn my attention to clearinghouses and securities lending. I’d also love to see more work in this area by BLPB readers, and if you’ve an article related to these topics, please do send it my way!