Stock-Loan Platforms Race To Offer CCPs
Counterparty risk a focus on both sides of Atlantic
February 2, 2009
Although the securities lending market is one of the world's largest, transactions have long been conducted over the counter and bilaterally between beneficial owners, agent banks and self-clearing broker-dealers. The collapse of players such as Lehman Brothers and Bear Stearns, however, has emphasized the need for counterparty guarantees.
On Jan. 23, Options Clearing Corp. (OCC) filed a proposal with the Securities and Exchange Commission to act as a central counterparty for Quadriserv's forthcoming AQS stock-loan platform. Meanwhile, competitor LendEX, which already has a centralized clearing solution in place, has begun discussions with the National Securities Clearing Corp. (NSCC).
The drive to introduce centralized clearing has emerged in Europe as well. The clearing arm of derivatives exchange Eurex, which plans to act as a CCP for Clearstream Banking Luxembourg's ASLplus securities lending program, said last week that it will provide Quadriserv's AQS with clearing and settlement services for U.K., German and Swiss equities. In a statement, Quadriserv CEO Thomas Perna cited the industry's "steady progress toward a centralized, structured marketplace for securities lending."
By mid-year, SecFinex, a stock-loan platform majority-owned by NYSE Euronext, expects to use LCH.Clearnet for clearing in the Euronext markets--France, Belgium, the Netherlands and Portugal--and SIX x-clear in Austria, Denmark, Finland, Germany, Norway, Sweden and Switzerland.
Josh Galper, managing principal of New York-based consultancy Finadium, has been analyzing the viability of stock loan platforms for a report due later this month. The success of the systems, he said, will be driven by their ability to mitigate counterparty risk. "CCPs are a strong contender to be that credit-risk mitigation mechanism," said Galper.
Central counterparties guarantee their members' trades, becoming the focus of counterparty risk and, in most cases, minimizing it because they are heavily capitalized industry utilities. Quadriserv customers, for example, will rely on the credit standing of OCC.
The New York-based brokerage announced in October that it was working with the U.S. options clearinghouse to provide services for AQS by early this quarter. That date appears to have slipped, given that comments on the proposal are due Feb. 19. The SEC will then begin deliberations on OCC's framework, which, according to the filing, "can accommodate securities lending transactions proposed to be executed through electronic trading systems." Unusual for a filing from a self-regulatory organization (SRO), however, is that OCC specifically mentions Quadriserv, although it could provide CCP services to other participants as well. Quadriserv did not respond to requests for comment.
A Head Start
LendEX, started by Locatestock.com and Kalorama Partners, a consultancy run by former SEC chairman Harvey Pitt, appears to have a head start. LendEX is in "live beta" with five clients who are actively lending and borrowing securities, said John Tabacco, chief executive of Jersey City, N.J.-based Locatestock.com. According to Tabacco, participants include Mizuho Securities, the U.S. affiliate of Mizuho Corporate Bank; Lek Securities Corp., a New York-based correspondent clearing firm and prime broker; and Alaska USA Trust Co.
A custodial bank and subsidiary of Alaska USA Federal Credit Union, Alaska USA is a member and shareholder of the Depository Trust Co. (DTC). While LendEX talks to NSCC, a fellow Depository Trust & Clearing Corp. subsidiary, about acting as its CCP, it is using Alaska USA's DTC facility for centralized clearing, said Tabacco. "The DTC's recognition of our clearing model validates our efforts and our place as first to market in the growing area of electronic securities lending," he added.
