Trading Transparency and the SEC Proposals

hello and welcome to securities landing saturday i'm roy zimmer hansel and i'm your host i'm going to be talking about something that the sec in the u.s has just brought to light they're concerned about transparency in the securities lending market so this week and next week i'm going to be talking about just that point i'm going to be talking about trading transparency in securities lending so if securities lending is your thing if you're a lender a borrower an intermediary or part of the ecosystem or maybe you're just interested in learning more about securities lending then this is the place for you let's get started [Music] hello everyone it's another saturday as i said i'm going to be talking about trading transparency today a super timely topic and i'll give you my views on the infrastructure the issues the challenges it raises and i'll give you a few comments on the sec proposals which i will refine over time no doubt but this is a short consultation window so we've only got a few weeks to actually make our comments known again many of you will know that you can download the slides from this series and this is the location for it so it's just bitly slash sl fundamentals spelled like that so if you are interested we had quite a lot of people sign up after last week's short selling episode [Music] [Applause] [Music] always looking for more viewers and remember if you like these videos and if you think that they add value to you please uh give us a thumbs up depending on which platform you're watching this on we really appreciate it because that way we also know which videos work the best for you which ones give the most information as always i've got my slide deck here we go if you're out there i know i need a producer but i'm waiting for someone to volunteer so if you know someone that wants to be a producer of this show and learn and participate in this then just get in touch with me um today trading transparency next week we'll be looking at things like voting we'll look at taxation again several different aspects of transparency today is just trading activity okay these are the topics we're going to talk about so first of all we're going to define what is market transparency then we are going to look at a definition of market depth and and what i'll do for each of these topics is give you the explanation of it and then go into what my assessment is of security designing first of all the key relevant issues and then the bottom line in each of these items as it says at the bottom as soon as i clear the caption it's for information and for entertainment purposes only always talk to a professional before you get involved with security designing or indeed anything involving financial markets again let me just repeat that if you like this subscribe we are well on our way to halfway of the qualifications that we need but we need 500 subscribers to be able to get to an area where i can put up a community site we get more and more questions from viewers every week and i love engaging with that i can do a lot more if we can get to the community page of the youtube channel in order to do that we need to get to 500 subscribers i think we're between 350 and 360. so we are a good part of the way there but i need your help if you like this please show it to someone else that you think might also like it and let them make up their mind whether they want to be a subscriber or not i put my glasses on because we're going to talk about definitions today i've taken two different definitions one from wikipedia one from investopedia one because wikipedia covers more markets the second part covers more investors so the bits that i've highlighted in blue really talk about what market transparency is so as far as the definition goes it's really about what products and services are available the market depth or how much is available to trade the price it gets traded at and where you would trade it as the final sentence says these are really important requirements in order to have a free market that is completely efficient so you can have free markets that aren't efficient but ideally you'd want to have it be as efficient as possible the reason i put in the second one in particular is it talks about the various fees that people will be charged to to process them okay so again that's an important part of the considerations here the recap just the reason i'm doing a recap on securities lending is because when people talk about market transparency often they're comparing it to cash market executions and while i understand that at a surface level you could say this is no different whether you buy or sell a stock or borrower lender stock it's the same thing why not have more transparency and while at the top level i can see that practically that doesn't apply here in my opinion so i want to actually give you some of the reasons why remember securities lending is all secondary market transaction so the need for a loan or a borrow is driven by something else so that might be a short sale in which case indeed you need to borrow the securities to cover the short sale or it might be a collateral exchange what we call collateral transformation so again that's what creates the need to borrow and lend but in and of itself securities lending transactions don't just happen organically they need to be driven by something else and very different to a normal cash market execution securities lending creates ongoing credit exposures so borrowers over collateralize lenders even though they're over collateralized market conditions can change markets can become volatile prices can change and they have potential credit exposure to intermediaries so that's very different from an execution where you just do it and once the trade is settled that's the end of the transaction now because the continuity of securities lending is really driven by the ability for investors to substitute so a lender who lends a security today isn't committed to lending it tomorrow they can close out that position and a lending agent will substitute another client for that or a borrower will have to go to another agent now while that's a good thing it also creates levels of complexity number one the complexity is that each and every investor is different they have different credit appetites they have different approval levels they have different counterparty assessment processes so there's many variables in that and in any case even though there's a full stop missing after the word institution fewer than 20 of lenders of investors lend their securities and even the ones that do lend don't necessarily lend them to every borrower in the market so what you already have at the beginning is a constrained market this is a small proportion of the total free float available in securities be they equities or bonds so you're already starting with a smaller universe and even that smaller universe doesn't deal with everyone else right now one of the reasons that they don't deal with anyone else part of it of course is credit approvals they may not be able to get credit approvals if you are a lender you may not get a credit approvals for all the borrowers if you're a borrower you may not be able to do the credit work involved with assessing thousands of beneficial owner investors that make their securities available for loan so there's an element of credit exposure but also just an element of work and prioritization so those things add challenges to the process security sending is also a cross-market cross-asset cross-current business and so it that adds additional risk because of volatility could be could be compounded by multiple movements in multiple markets but also makes the credit assessment more challenging and also the investor criteria which is variable as i've said before also becomes more complex when it goes across market and even if you get rid of the cross-currency environment if you only look at the us you still have all of the investors differentiating themselves they may not want to lend every borrower and not every borrower may want to borrow from every lender because remember borrowers have a real ongoing exposure to lenders all the time because they're over collateralizing whereas lenders only have a potential exposure to borrowers if there's a default and there's a and market volatility goes against their over collateralized positions now the complexities of the work the actual business the processing of the transactions and then the credit implications means that usually end lenders and then borrowers use intermediaries in the middle and those intermediaries whether they're agent lenders or prime brokers they add another layer of transaction processing and additional what i've called here business discrimination what i mean by that is a selectivity of who you will deal with and under what terms you will do and then also finally the current business models that an agent lender or prime broker use might impact the loan pricing of transactions and in fact whether there's a loan to do at all so there's some agent lenders that only lend out relatively high priced securities so securities that are in a reasonable amount of demand and what that means is that the residual amount of supply isn't available to the market just because economically it isn't worthwhile and so you have this universe which is constrained by the number of participants further constrained by counterparty selections further constrained by business models so it this really to me doesn't reflect cash markets really in many ways at all and so that calls into question the demand for greater transparency on price but i'll come back to that let's look at market depth so market depth talks about the measure of the supply and demand for liquid tradable assets there's a reason that i've highlighted that because as you get into otc stocks or less liquid securities bid ask prices widen and there may not actually be a commitment to execute at those prices so for parts of this presentation i'm going to concentrate on what are liquid tradable assets and as it says here the greater the quantity of the orders of supply or demand the deeper and more liquid the market is considered to be now remember that for the most liquid securities you're gonna have the tightest bid offer spreads in there and so the revenue opportunities the spread that traders can make on that are reduced and so some people don't trade it for that reason and the question could also apply to securities lending if the spreads are so low because you have this super efficient super deep and liquid markets will people participate and we know for a fact that today already because of those business and economic concerns many people don't participate in the most widely available liquid securities i'm not convinced that hurts the market because whether a new lender comes into the market and lends their apple shares or not makes no difference to apple or any other potential investor be they long or short so let me just compare securities lending on this particular issue of market depth one is looking at the supply side and the demand side and then the other question is dividing it into the pre-trade and the pr and the post trade so what do i mean by all of this first of all when a short seller wants to short sell a security or put an order into short sell they in many jurisdictions need to satisfy what's called the locate requirement where they can do an assessment of the market and determine whether there's a reasonable chance for them to be able to borrow the securities in order to execute the short sale and be able to deliver on settlement date now practically and i've done other videos on this all include i'll include a link here practically what happens is the prime broker intermediaries get feeds from all of the agent lenders that they deal with look at the portfolio uh totality of each position do a subset of that figure because they need to be certain it's those positions are reasonably stable and they can confidently borrow those securities do that extract distribute it to their clients and so the prime brokers are pushing the availability of the supply to the potential short sellers now in addition to that sometimes short sellers will want to trade more than the position that they're shown or they want to trade securities that aren't shown by their prime broker and that's really the pull so the short seller is calling up their service providers saying please give me information go do a search and tell me how much of this i can borrow then once they've actually done that then you get into the trading side and then once they've satisfied themselves that they can access it and satisfy the locate requirement then they're free to short sell as and when they find it opportune so we stay with the pre-trade side of things if you look at that demand side so the supply has come to them from their prime broker the demand side we call these things many different things right so if you have a really widely available blue chip stock that is core to most people's portfolios and there's a lot of availability of supply the land it can be called uh general in these prime broker files they're often called good to trade files so you can just go ahead and trade them or it can also be easy meaning easy to borrow securities so to me those are what i would consider to be the liquid tradable assets that was referred to here in terms of market depth because there you have plenty of supply whatever demand there is can be satisfied and there isn't really a lot of complexity to it and the price variation which i'll talk about in a minute is very low but these hard to borrow or specials or even warms all of these things what that means is that the demand to borrow these exceeds the supply and so that creates an additional challenge and so the market depth of those is going to be relatively small by definition you're saying that the supply is short here there isn't much of an order book otherwise you'd be able to go out and borrow it and it would be a good to trade security and remember these are the securities that are in most demand by the by hedge funds or the end the end borrowers even retail investors and so there's a huge amount of demand for these assets and that scarcity value itself not only does it impact the price but it also impacts the tradability if everyone was doing that trade because it was enough supply there might not actually be a trade in there so you change any of these factors and it changes the whole pic now if we look at the pre-trade side so you've a short seller has got the securities or they know that they can satisfy the delivery requirement in all likelihood when it comes to trade you can see that the good to trade files you can just trade away on that so the demand side or the pre-trade side of things is really covered off how does it look in the post-trade world though so when a lender shows a borrower a position that means that it should in theory be available to that borrower and while that may be true at a macro level where an agent lender will aggregate all of their availability from all of their clients that have approved the borrower that they give that information to at an individual client level they may sell the securities so it was available today but it's now been sold out so maybe there isn't that supply or maybe it's available and they could do the loan but the borrower has reached their credit limit with that counterpart and so you also don't have a loan or maybe there is a a a loan available from a client where the borrower hasn't approved it so remember the lender is sending to the borrower everyone that will lend to the borrower that doesn't mean the borrower is willing to borrow from every one of the lenders so while the securities and theory are available it doesn't mean that when push comes to shove when you actually need to execute a trade that it really is available now the trades themselves they can be bilateral or via platforms i've got a slide on that in a minute and again this all of this is dependent on the stability of the positions and the credit relationships with all of those entities but also the practices by the investors so maybe the securities are available but maybe that investor is an active voter of their shares so they'd be willing to lend it but they automatically recall it when you're coming up to any kind of voting period or because borrowers are required to substitute dividends if a loan goes out over a dividend period and they have to make up that money to the lender so that the lender is whole in the same position that they would have been had they not been doing lending maybe that lender's dividend profile it makes the stock to expect and so there's a huge number of these sorts of real minutia and nuances that change the picture and then the final point on the supply side is that the cost of lending impacts the loan price so a smaller transaction in a stock will generate potentially a much higher fee right because the settlement charges involved in moving those securities might be quite high so moving a hundred dollars worth of stock as a proportion on the fee side compared to lending a million or 10 million dollars of that same stock is huge so the you could have a stock two trades in apple shares a really widely available stock one at an extremely low price and one that would look ridiculously high priced because it represents a small transaction size and therefore the settlement charges associated with might be very high relative to the value of the loan okay so that's just on the size of the transaction collateral i'll talk about in a minute where the collateral types have a chain have an impact on the business or the transaction costs how the intermediary indemnifies a client if that's provided there's different ways and that agent lenders do that and those different ways carry different costs and then ultimately it's a matter of cost so even if it looks like securities are available it doesn't mean they're available to you if you are the end borrower now if we look at the demand side the demand side people are looking to borrow securities because of new trades obviously or maybe it's because they have an existing loan outstanding and they've been recalled someone's asked for the shares back so they have to borrow it to replace it so that's not a new transaction in the market that short sale or that collateral transfers that's already been done and so this is really to substitute it and exercise that continuity i referred a few minutes ago or it could actually just be simply a fail on a long position so this involves no short selling this is just a client made a sale and for whatever reason can't deliver the securities and you may be looking to borrow to cover that settlement fail in the market maybe to avoid a buy-in and then the other comment there which i skipped over which is refinancing so let's say i have five loans out standard five boroughs outstanding each of a hundred shares i might refinance that into a single transaction of 500 shares so again i'd be closing out five by 100 and putting on a new loan of one by 500 and that might make more economic and management sense so again that's not necessarily a new transaction but the low demand high supply stocks there's already no touch automated executions in in most of those cases so that's already to me a really liquid tradable asset and i'm not convinced that publishing any information on that really adds anything to anyone and the high demand stocks of course as i've said i'd consider those to be relatively illiquid that's why they have high prices and so you're almost saying there's low order depth of course there's low order depth if there wasn't if there was already a lot of supply there you wouldn't have an issue so even if it looks like there's supply that doesn't mean that there is supply available and that supply is not necessarily available to everyone and the high demand stocks by definition are high demand because there isn't much in the market to begin with because again fewer than 20 of institutional investors by asset value lend their securities let's talk about price price transparency as says typically refers to the extent to which information about bid prices ask prices and trading quantities for a specific stock are available let me go through some of my comments here so the securities loan transaction price isn't really a price and what what i mean by that is the the fee that gets charged is a combination of factors because if it's collateralized by cash so wait let me stop everything starts with the intrinsic value of the security what's the relative figure of the supply of assets available for loan and the demand to borrow those assets right that's the question so that's where you start with then you look at it and you say what kind of collateral does a borrower want to give or what kind of collateral does a lender accept and so if it's cash collateral and again there's other videos i have on this if it's cash collateral then the lender will take it and reinvest it and two different clients might have two different appetites for reinvestment risk and therefore they're taking cash generating revenue off of it and they may give different lending prices to the borrower for exactly the same stock for exactly the same size with the same dividend profile but two different outcomes because their return might be high now that's not something that price but that's not available to anyone in the market they see one stock going at 20 basis points and another start going at 10 basis points that go why is one twice the size of the other twice the price of the other and that's because of individual choices that aren't transparent to any and can't be made transparent to anyone because you can't get to the level of in theory you can do anything but it wouldn't really add value to get to the level of disclosing what the investments are just like no other investor publishes what they do live in real time themselves asset managers just don't do that and the regulators don't require them to do that so i don't see why it would follow that they could do it here if it's non-cash collateral so other securities stocks or bonds then again even within that there are different ranges that different investors will accept some will take a wider range of non-cash collateral some will take a narrower range and both of those then have a cost impact to the borrower in terms of opportunity cost if there's a really high form of collateral that a lender that's the only thing they'll accept well the borrower has to say would i rather allocate it to that lender or do i have better uses for it organizationally and maybe i do and if i do that then i have to find a different lender somewhere else and so even if i do decide that i'm going to give this high quality asset to that lender my cost my opportunity cost for using that asset is going to be higher so i'll pay a lower fee again if you just publish that information that won't be obvious to anyone no one will know that it might look like it's a mispriced transaction and i'm not certain that adds value to anyone's decision and of course sometimes borrowers do bilateral collateral and sometimes they do tri-party collateral and i'm going to do a video on that in the next few weeks and that's very much thank you to amel who is is one of the one of one of my viewers and subscribers who suggested that it's a great idea and i will go into that in a few weeks so thank you for that so again borrowers have different cost profiles if they have to put uh collateral into tri party as opposed to bilateral now of course there's other benefits to tri party that's why they are uh so dominant in their positions so everything is trade-offs here now the other thing about securities loan transactions is because they have a lifespan to them they're also negotiable and renegotiable throughout the life of a loan to reflect the different supply demand dynamics and other factors influencing the pricing so again unlike an execution if something is worth 10 basis points on day one it might be worth 100 basis points 30 days later and again so what does that tell you and then finally and this is by implication one of the factors that talks about business models this is where the lending agent intermediaries they absorb all of the transaction costs on behalf of the lenders and of course they carry on the maintenance for them it's an economic decision about the size and the scale and the spread and all of that which doesn't have any real tie to the intrinsic value of the asset so unlike buying or selling a stock or a bond this is the economic cost of processing a transaction all right so even if you have a high demand stock that would generate a huge fee in relative terms the actual absolute fee it generates might be very small if it's a low value transaction and it wouldn't make sense to actually lose money to lend that security for an agent lender hopefully that makes that makes some sense so let me just really summarize this for securities landing on price so the general collateral or gc securities they're widely available and they trade within a relatively narrow band it's never going to be the same price because of all these variables that i talk about i've had a question come in from kartik thanks that question he basically says is the collateral accepted based on the securities lending agreements yeah there's a securities lending agreement between an agent lender and their underlying client where the client says this is the collateral that you're able to take if it's done bilaterally or in tri party one way or the other the lend agent lender communicates that to the borrower and every time there's a transaction the borrower will say what kind of collateral do they take and the agent lender will say this is what it is now that might change over time and there might be concentration limits diversification requirements clients might be okay with assets at one point and then not at another point so it's usually done in a separate schedule which can be amended over time and then reflected in tri party if that's the case so that's a really good question and that's really a good example of the variability that's the variability by client of their collateral selection process and look a key issue that i think will become even more important which i'll talk about next week is the selection of esg collateral and how that might add another layer of complexity as invest get involved there another really good question about using smart contracts i think it's really early days for that so the trade associations have been working on the definitions there i think at some point that's an inevitability but whether i have any hair left by that time or not who knows but definitely it's coming down the road and i don't think it's as far away as some people think and that's definitely the the path we're on if we go back to this back to the second point here not all securities are available for loan and all the would-be borrowers because of the credit consideration i know i keep coming back to this point but this is a massive differentiator and so not so even if imagine even if you have credit limits borrower has a limit for lender lender has a limit for the borrower the agent lender that's providing an indemnity might also have its own credit constraints on what exposure they can have to the borrower because as you'll see in the indemnification video that i'll put a link into the risk of that borrower going into default under the indemnification becomes that of the agent lenders so they also have potential credit exposure to that borrower so there's multiple layers there okay so not everything that looks like it's available that will be published in theory in in future because of sec proposals will actually be available to anyone so the question is does it make it a better market or not and i'll come back to that and the agent lender distribution strategies this kind of intrinsic value focus or absolute return focus is it differentiates and most people operate somewhere in between that we've talked a lot about the collateral transactions the considerations on the size the purpose of the borrower even on the most liquid securities on gc that's why you have a different price range and so if you have price differentials at the most liquid end of things of course when you get to the less liquid end of things the non-general collateral securities warm special hard to borrow there's a much wider range of trading prices and many of those reasons are completely explainable and usually down to economics so the bottom line here to me is that executed prices aren't really necessarily available or replicable by everyone in the market so unlike an apple stock unlike an apple share which will generally be the same price to everyone that wants to do that's not true for securities land right now what prices are good for is indicating what the trend is are the prices trending up or trending down is there more uh supply in the market coming in or is there more demand for the existing supply so those are the kinds of questions okay so how does securities lending measure up the realities i think there's many layers of challenge which is why you get this disparity in pricing amongst entities and of course there are more efficient firms and less efficient firms so i'm certain there's an element of service quality and pricing and dynamism in there the other issue is look if you are a lender in the market and you are lending at the highest price in the market so on any given day you're lending your apple shares out for higher than anyone else in the market what you're also at risk of is a borrower saying that's too expensive i'm going to refinance somewhere else so on a given day you could look like you're the best but actually over the course of a loan you might actually underperform because you've had the highest price so there's a lot of there's a lot of nuance to this a lot of art as well as the science of the numbers another question from a linkedin user are any products available for microfine and what's the role of tokens in this look again i'll go back to my previous comments about smart contracts this is still in the age of analog really those things inevitably are coming and we see the kind of the kind of idea of immobilization particularly on the collateral space with work being done by firms like hqlax where i think these things are trending in this direction but it's very much a watch this space so i hope that's answered your question i i could add to that that there is in theory activity in in israel that is much more digitally driven blockchain driven in terms of scalability i don't know about that there was a recent transaction between two german banks deca bank and messler bank or bank where they did actually a blockchain transaction so it is coming but but fundamentally even if two parties agree today to do all of their trades between each other blockchain the reality is most firms have 50 75 100 200 300 counterparties and the transition time to getting all of those counterparties means that for for the foreseeable future you will be dominated by traditional lending activity growing blockchain type transactions but i think it'll be quite some time yet before the it'll be predominantly a different form than it is today right where do things happen the key for a borrower who whose job is to get that security in that they need because there's a short sale the reality is they'll do anything they can they'll go anywhere to anyone under any terms they can if it's a hard to borrow asset they will scrounge and they will trade bilaterally they'll trade on platforms they'll send carrier pigeons they'll do what it takes to get those securities because that's their job and while trading platforms do offer centralized meeting places there are additional costs involved inevitably in that and they aren't always necessary for to execute in fact sometimes it would add an extra layer of time and complexity to it whereas bilateral transactions in specific instances might be faster and more more accessible and more efficient and remember not all of the lenders have arrangements in place and borrowers of course but since this is demand driven it's about lenders and if a lender isn't on a trading platform but has assets that a borrower wants to have that borrower will do what it takes to get those assets a lender doesn't necessarily have to be on a platform although it's difficult to be efficient and scalable unless you and that's why bilateral trading is commonplace standardization in the industry is still lacking and i think it's a challenge to bring it into the market because all of this depends on the flexibility of the lender being able to participate in lending programs but not having to commit their assets to it the challenge that bilateral trading is still commonplace in the market even though the majority of transactions go through trading venues but standardization is lacking and part of the reason that standardization is lacking is because counterparties lenders in particular want to be able to want to be able to trade flexibly they'll make their securities available if the lenders and the borrowers recognize that they need to get securities back when they need to get them back whether that's to vote or because they sell or just because they want them back and if you put more restrictive tenants in place saying you had to make securities available for a minimum period of time trade settlement had to happen by this number of days all of those sorts of things would make the market more standardized but not necessarily more reflect okay and flexibility is the key in this business if you're more flexible you're more likely to make money if you're willing to trade off flexibility for more constraints on what you do often you can generate premiums from that because you're saying look i'm willing to commit to make my securities available for a fixed period of time for example and you might be able to get a premium and so the bottom line for all of this is that although trading venues carry the majority of transaction votes the they have to by definition reflect the underlying bilateral credits between the end borrower or the their prime broker intermediary and the end lender because that's where the credit exposures are put a layer on top of that and you still have the agent lender exposures so it's not as straightforward as a cash market execution okay so there you go that's where they get done i'm going to turn to the sec proposals this is this has gone on for a while so i'll try to get through this but this is really important so not this past week but the end of the week before the securities exchange commission and the u.s proposed a new rule to provide transparency in the securities lending market where more reporting will be required if the rule goes through be required to be made to the sec and some of that information will be public and look the report itself starts out in fact with the phrase the securities lending market is opaque so they have very much zeroed in on this particular issue and it's one that they want to address so that's what the chairman says so that's what they are going to explore this is interesting because this is a short consultation period i think it's a 30-day period for consultation so that's pretty quick as i understand it right like my view is regulators can ask for whatever information they want we need them to stay on top of markets we need them to make certain that there's no abuse we need them to make certain the markets are as efficient as possible whatever they determine they need to be proper stewards of mark so i don't have a problem with that and in europe the eu's regulation the securities finance transaction reporting regulation sftr it has been super valuable for all of the market participants that have had to comply and they all have a better understanding of their business now i'm not convinced yet that the regulatory use of that has had an impact on anything yet i'm sure that depends on which national competent authority you're talking about as some have a better understanding of it than others but it's not yet clear that there's value to the regulator certainly the market participant and so maybe the sec has uh they have some kind of a practical oversight issue that they think it will be resolved by the securities lending data that they want to get so look i have i don't have a problem with that yes it's a pain in the butt and yes it'll be expensive they've tried to estimate the spending on it it's an estimate right i'm not convinced they've got it right but but look there will be costs to it to operate in a regulated market is costly that's just a fact so that's my view my c and i have a lot of sympathy for regulation i i can see why not just regulators but the public particularly particularly post post gamestop why the public wants to see more ticker-like information in the market i i get all of that the the problem that i foresee though is that you know whereas in buying or selling a stock investors can get a pretty good idea of the cost of buying or selling that stock they won't necessarily get that same value from understanding the value that they'll get from lending that security or the cost to borrow it if they want to borrow and they won't really know what the volumes are because of all these layers of complexity nuance and self-selection i think that i have been talking about so that's what i see as a potential issue on that and so really my question to the sec will be would publication of a securities landing ticker make the wider market more effective and i guess there's a few things to say on that would lending or borrowing price disclosure bring more investors to market i don't think so at all agent lenders are evaluating portfolios for investors all the time ones that aren't in the market as well as ones that are in the market but ones that aren't in the market they are constantly reviewing that so there's lots of people that know the value of their portfolio that after hearing the value of the portfolio decided not to participate in the market again so i don't think and on the borrowing side so borrowing is an important element of the borrowing cost is an important element for would-be short sellers but it's not the only cost and so to me i think more disclosure of information might bring people in at the periphery but nothing fundamental i don't think it fundamentally will make a difference if we then ask the next question which is would it reduce the borrowing costs or lending revenues would it take that price disparity between what borrowers have to pay and what the different lenders are willing to lend on would it actually bring it into a narrower range i think probably but the other factors have more influence and look anyone that's already in this market there is publicly or not sorry privately available data that that everyone in the market gets right everyone in the securities lending market right now that's at a a certain scale and it's not necessarily a high scale they get that data today and so they can see and assess where their pricing is relative to the rest of the market so if it was that if it was just a matter of information there wouldn't be the wide disparity there is today so making that same information available to a wider audience i'm not convinced that makes any difference at all maybe the worst price guide maybe and i already told you earlier in this episode why i think having the best price is not necessarily an advantage the third question i'm going to ask is are recent transactions indicative of executable prices in future and so the answer to that is yes to an extent but the credit availability the reinvestment risk appetite the transaction size the lender business all of those have more impact than just the recent transaction prices okay again i'm not convinced that that's the but of course again let me just repeat they are an important indicator of the likely future direction of it because things tend to move in in direction okay so my summary is like i recognize that the information will be good and it'll be powerful and it'll be important for regulators to get and that's potentially a good thing but to me my concern is that publishing this data to the public without these issues of context and collateral and risk and jurisdiction all of that i think it risks giving people the wrong information if it shows there's a million shares of stock available to loan first of all agent lenders never lend out 100 of what's available secondly many beneficial owners say never lend more than half of my position third regulators have in place at a fund level for many different fund types restrictions on how much of a fund could lend out so they might have the securities they might be willing to lend them they might be willing to lend them to the borrower but they already have too much on loan and they can't make that loan and so all of these factors i think could distort a trading activity people could think oh i can short it oh look i think i can actually i can make some money lending it that's not necessarily true it's impossible to get this level of complexity of information into the public domain and so i think it risks distorting real-life liquidity and impacting markets in a negative way so if the sec wants the information by all means force people to do it but think very carefully before you start publishing just a quick pitch of course we always talk about our securities learning courses and that course in the top right corner which i keep telling you every week is going to be done isn't done yet i thought it was going to be done my weekends are too busy because i'm doing things like this i will do that i promise i'll finish out we've had a couple people sign up uh this past week for the introduction to securities learning course so quite excited about having new students on that and we always we have people signing up for the free primer all the time lots of course information there love to share with you let you know what our thoughts are on securities lending let's summarize all of this stuff get it back up on screen so securities lending is an important part of developed and developing capital markets and yeah i think that was included in gary gensler's comments which is why it's important to them to get it right it is a critical part of the operating of the capital markets the market depth question the market depth it has some visibility in the business today but because execution is really totally reliant on credit relationships to be able to execute the market depth information even if it was completely visible wouldn't necessarily have full value oh it went too far and the prices the lending and borrowing fees that people pay is much more than the simple supply demand economics that you would see in a cash market and yes all of you who have seen loads of videos from me the reality is i say all the time securities lending is basic supply demand economics 101 while that's true to an extent you can see with the layering that i've done here that there's many more issues there's many more issues there and kartik again i agree too much information restricts the smooth flow of for the business and that's really from the trading end all the way through as you say to the operational process too many choices actually satisfies investor needs but really constrains the business and actually adds cost to it and can actually make operational processes much more difficult trading venues of course they process a majority of the transactions but again the job of a borrower is to hunt down that security on the best possible terms whether that's via trading venue or directly is a secondary concern the need is to get those securities and finally with respect to the sec proposals the aspect of publication to me concerns me i think it needs a lot more scrutiny obviously there'll be a huge amount of commentary on it and in my view as it looks right now wouldn't to me necessarily make markets better and would add additional costs and still not make the markets better and potentially worse so that's it next week i'm going to be talking about transparency again except this time it'll be non-trading i'm roy zimmer hansel thanks very much for doing this this is much longer than ones i've done in a long time appreciate some excellent questions today sorry about the sound problem that won't be known to the uh people watching this on replay thanks for being with me this saturday have a great weekend have a great rest of your saturday have a great week and i hope to see you next saturday [Music] you

2021-11-30 05:47

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