Securities Finance Overview
Origins of the market, identification of major players and their motivations, factors fuelling supply and demand. Why people borrow securities. Benefits of securities lending for investors. Current returns available in the equity and bond lending markets.
Exercise: Motivations
Delegates are asked to examine a number of securities lending trades and to identify the motivations of all players.
The Mechanics of a Securities Loan
Loan agreement, fee negotiation, delivery of securities and collateral, fee versus rebate, collateral margin, returns and recalls, fee accruals. Marking to market; treatment of coupon/dividend payments and corporate actions.
Case Study Part 1: Stock Loan Trader
Based on the shorts, fails and specials appearing on their position screens and given availability lists from counterparties delegates determine what trades are required and input them on PCs using the Martini TM system. Then they will be asked to mark their positions to market and take appropriate actions.
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Repurchase Agreements
Origin and purpose; simple bond example. Equity repo in the international market.
Case Study Part 2: Repos
Delegates will use repos to finance their remaining long positions.
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Key Tax Considerations
Special tax treatment of securities lending and repo transactions.
Withholding tax on dividends and differential eligibility for reclaims; stamp duty reserve tax; classic versus imputation tax systems; tax credits.
Exercise: Yield Enhancement
Lending Alternatives and Counterparty Selection
To lend or not to lend; Relative merits of using a custodian or third-party agent; exclusive arrangements.
Market Players in Securities Finance
Why proprietary traders and hedge funds behave differently from asset managers: use of leverage and short-selling. Different hedge fund styles. The role of prime brokers. Main market players.
Trading Strategies that Drive Borrowing Demands
The main principles of market-neutral trading. Applications in the equity and bond cash markets: pairs trading, yield curve arbitrage, long/short programmes, risk arbitrage. Brief reference to applications with derivatives.
Exercise: Market Neutral Trading
Risk and Documentation in Securities Lending
Counterparty and collateral risk versus regulatory and operational risk. Legal risk; market risk. How documentation mitigates risk: main features of securities lending agreements (GMSLA).
Exercise: Risk Scenario
Collateral Policy and Collateral Management
Lender versus borrower preferences and why. Opportunities offered by different forms of collateral. Collateral costs versus clearing costs. Triparty collateral management facilities. A look at the challenge of collateral management for an intermediary.
Exercise: Collateral Management
An In-Depth Look at the UK Market
Recent regulatory developments in the UK; Lending in Crest the UK difference; cash collateral and margin, settlement and returns, mark-to-market; stamp duty and stock loans; colateralisation; DBVs explained; legal and regulatory issues.
Electronic Securities Lending Exchanges
Why electronic platforms? Advantages and criticisms; Characteristics of electronic platforms; Characteristics of multi-user and single-user providers; Portraits of several providers; Benefits to lenders and borrowers.
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