Tom Veneziano, Head of North America Product

On June 6th, the Canadian, and much of the North American, securities finance community gathered in Toronto for the 14th Annual CASLA Conference on Securities Lending. Tom Veneziano was a panelist on the ‘Regulatory Discussion: Who is Drinking and Who is Paying?’ These are Tom’s key takeaways from the session and conference.

Basel III capital charges – nearing the ‘end game’… or not?

From the perspective of the global securities lending industry, much of the conference’s conversation revolved around the Basel III End Game, and whether it was final as the name suggests.

Many questions remain unanswered: Will Basel III be implemented in its current form? Or will the rumblings across the industry – the word “overreach” having been uttered on many occasions – cause it to be modified? Or might it even be abandoned entirely? It quickly became clear at CASLA that the conversation has yet to be settled.

That said, whether the End Game in its currently proposed format is in sight, or the status quo prevails, few if any would deny that macro drivers, like today’s high-interest-rate environment, make managing capital, balance sheets and RWAs effectively more relevant than ever. Trends like these, in turn, explain the consistent rise in appetite for solutions that optimize financial resources and funding, such as Pirum’s CollateralConnect and ECPOConnect, offered by Pirum in collaboration with BNY.

SEC Rule 10c-1a – more complex than expected, with further surprises possible

The industry had expected the SEC’s upcoming transparency-focused reporting regulation, SEC Rule 10c-1a, to be a relatively light lift (at least compared to SFTR). Most had anticipated having to begin reporting on 10 to 13 fields, but the recently announced FINRA rule and technical specifications include 48 reportable fields.

The industry has yet to fully digest this surprise, particularly as the proposals also included the added challenge of intraday reporting.

Had the ‘light’ version on the menu prevailed, building it yourself in-house could have been a more realistic option. With this new information to hand, however, going with a specialist vendor solution – like Pirum’s joint solution with S&P Global Market Intelligence Cappitech – has undeniably become the most rational course of action when considering factors such as lift/resource required, cost/benefit analysis, and the need to ensure that costly regulatory penalties are avoided.

Mandatory repo clearing – what are the costs and what would it look like?

Our panel discussed at length the idea behind bilateral repo clearing and, if it were implemented, what the cost would be, and who would end up picking up the tab. The panel consensus – based on current information – was that market participants that are not FICC clearing members (e.g. agent lenders) are going to have to find a sponsor if they choose to remain in the game. This cost factor, compounded with the uncertainty in current proposals, seemed to concern the whole repo community at the conference.

Important questions around liquidity also remain unanswered: Would this regime bring new market participants – and therefore liquidity – to the repo industry? Or would it in fact push out existing players that engage in repo, such as tier 2 and tier 3 banks and agent lenders?

In addition, the OFR proposal to report on non-centrally cleared bi-lateral repo is on the table. Currently, some US$ 2-3 trillion worth of repo is traded bilaterally. Mandatory clearing could bring this down to 300 billion. Remaining questions in this context are: Who would be impacted and how would this overlap with SEC Rule 10c-1a?

Whether introduced or not, whether separate or overlapping with 10c-1a, our joint reporting solution with S&P Cappitech obviates such concerns, as it has a handle on them all.

Focus on Canada – new fails regulations coming to play

The Canadian securities lending industry is also looking ahead at a potential new regulation that could introduce a fail charge (similar to CSDR in Europe). The idea, as it currently stands, is that a pilot group’s fails would be analyzed, with a view to then potentially introducing, six to twelve months down the line, a charge of 50 basis points per day for such fails (for context, a similar charge in the US is 300 bps per day).

It was clear from the conference that Canadian market participants are concerned about such proposed charges, and that they have already done the maths in terms of how the 50 bps per day would translate into a dollar-value cost.

As for mandatory clearing, unanswered questions remained for many conference participants. Particularly, whether such a fail charge would translate into more efficient settlements in Canada, or whether they would be overly punitive and risk impacting the Canadian securities lending industry, including market liquidity, negatively.

In all four themes discussed above, the suite of Pirum solutions, featuring: Post Trade Services, Trade Risk Manager (which is already helping firms in Europe avoid fails and CSDR penalties), as well as Recalls Manager and the wider Front Office suite, help our clients ensure that they can 'enjoy the party', with minimal impact on their operations and without incurring build costs. All thanks to automation, and our industry-leading 99.8% STP.

And thank you, CASLA, for yet another first-rate, insightful and engaging conference.