Eurex Expands Securities Lending CCP

Terry Flanagan

Eurex Clearing is aiming to double the users on its securities lending CCP and is exploring expanding the service into the US.

Eurex Clearing’s Lending CCP was launched in November 2012. Gerard Denham, clearing sales & relations, vice president of Eurex Clearing, told Markets Media that the first two clients joined in 2012. He said the Lending CCP now has six active members and a very strong pipeline with around 10 additional potential users.

Jonathan Lombardo, clearing sales & relations,vice president Eurex Clearing told Markets Media: “At the end of this year we aim to have broadened our member base to between 10 and 15 participants and there is plenty of room for further growth.”

Eurex’s Lending CCP does not change the relationship-based bilateral trading in the market but makes securities lending mire capital efficient. Basel III regulations will reduce the risk-weighting of trades that are centrally cleared to 2%, against 20% for non-cleared transactions.

Firms can achieve further capital efficiencies through cross-margining of securities finance transactions with other business lines across Eurex Clearing.

Denham said Eurex spent a lot of time developing a post-trade system from scratch to manage corporate actions over the duration of a lending transaction.

“Our offering was developed as an STP process from beginning to end and does not need any manual intervention,” he added. “This enables an unbelievable difference in operational efficiencies which is now being realised by market participants on both the operational and trading side of the business.”

Denham said the the introduction of a CCP allows firms to be more analytical and strategic when deciding where to lend and borrow securities, and allow funds to increase the pool of borrowers with which they do business.

Andy Krangel, EMEA head of business management, agency lending, Investor Services at Citi, told Markets Media: “The use of a CCP allows us to deal with counterparties who would not otherwise be supported in our program due to credit rating restrictions imposed by beneficial owners. It enables us to mitigate risk and gives us the potential to expand distribution opportunities.”

Morgan Stanley joined the lending CCP last year and Natixis, the corporate, investment management and financial arm of France’s Groupe BPCE joined in January this year.

Gregoire Froehlich, trader-securities lending & borrowing, at Natixis said in a statement: “The CCP model for Natixis will not only help manage the rising burden of balance sheet regulation and costs, we believe it will also prompt new stock lending structures and business opportunities with non-standard profile counterparties.”

In January, BNY Mellon and State Street, two of largest global custodians securities lending agents, said they will aim to provide access for their clients to Eurex Clearing’s Lending CCP service.

Denham said: “The partnerships with BNY Mellon and State Street are important as they are two of the biggest global custodians. They will add liquidity and also have a very broad range of clients active in the securities financing markets.”

Lou Maiuri, head of securities finance at State Street, said in a statement: “The unique model of Eurex Clearing, by allowing beneficial owners direct CCP access via its specific lender license, provides significant benefits to market participants.

The specific lender license allows for greater participation by the buy-side by offering tiered membership and increasing the liquidity available to clients.

BNY Mellon and State Street also said they intend to work with Eurex Clearing to explore expanding the securities lending service into the US.

Eurex Clearing’s Lending CCP covers equities from five European markets – Belgium, France, Germany, the Netherlands and Switzerland – as well as a range of international fixed-income instruments and exchange-traded funds.

Krangel said it may not be economically sensible for Citi to use a CCP for all of its securities lending business.

“We will have to consider the costs of using a CCP. Additionally the current CCPs only cover a limited number of markets compared the number Citi offers through its global agency lending program,” he added. “However cleared trades will be a valuable segment of the market in the future.”

Denham said the Lending CCP will be adding further equity markets.

“The US market is a key focus, as there is a substantial interest in our solution as the majority of market participants appreciates the special advantages of this model – this allows participants to preserve their client relationships and deliver best execution with risk, resource and operational efficiencies,” Denham added.

Krangel said: “We would welcome CCPs in more markets. The US is a very big market for us so if Eurex expands there or another CCP replicates their model, then we would take a look.”

The introduction of a CCP is part of the securities lending market becoming more electronic with systems such as Equilend Eurex Repo and Pirum providing electronic confirmations and information flows into settlement added Krangel. He said: “Eventually the negotiation of trades will also become more electronic.”

Featured image by 22 North Gallery/Dollar Photo Club

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