SLT talks to Claudine Gallagher of BNP Paribas about risk, regulation and the firm’s new sub-custody offering in the US
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What are the current opportunities and challenges in the US market regarding sub-custody and securities lending?
Current securities lending opportunities centre on three key elements: implementing customised solutions for clients by differentiating oneself through greater transparency in all aspects of the service ranging from revenue generation under a transparent risk-adjusted framework; providing a robust risk management environment; and ensuring that reporting meets the expectations that clients require tailored to their individual needs. This sits alongside the need to ensure a high-touch client service to educate clients on the implications of the current regulatory environment. For BNP Paribas in the US, our aim is to leverage the bank’s global presence and financial strength in order to harness the attention of the beneficial owner’s client segment.
More specifically, how are regulations in the US affecting transparency in the securities lending market?
The changing regulatory environment is certain to affect the securities lending market. While the regulatory environment remains in flux, both industry regulators and clients will demand a greater amount of information from agent lenders. Lenders in this market should be prepared to meet and exceed the increased demand for information through their ability to deliver real-time loan and reinvestment details to clients as well as regulators, should the regulatory environment warrant this. Providers with a global presence will currently be providing this level of transparency to clients and providing it to appropriate regulatory bodies should be accomplished with relative ease.
It is becoming increasingly important that the service provider be well positioned to not only interpret the regulations, but also review with their clients the impact of regulations on their business activities. Client demand is driving the need for increased engagement and a high-touch relationship model. Part of this is accomplished through enhanced reporting and client education to address transparency needs.
How are US providers supporting their clients through regulatory change and ensuring the efficiency of their service?
Clients are seeking the support of their providers throughout the regulatory changes in the form of continuous communication, product education and in building their awareness about the potential impact of regulations on their revenue streams, loan balances and so on. Additionally, providers will need customised solutions for individual clients in terms of their respective risk profiles, reporting requirements, and relationship needs.
What is the appetite for risk in the US among securities lending clients? How can providers assist in controlling that risk and ensuring their interests are met?
The securities lending industry has gone through a series of well-known challenges over the past several years. As a result, and with little surprise, many beneficial owners have elected a more conservative strategy that has shifted the revenue attribution towards the loan element of the transaction. After several years of increased product education and understanding, clients have become more informed and engaged in their securities lending strategies, which has led to increased participation in securities lending by beneficial owners.
Our experience with clients has focused on continuous communication and playing an educational role to ensure client expectations are met and exceeded. Providing clients direct communication to our trading desks assists them in staying abreast of current market developments and helps them arrive at a better informed understanding of potential impacts on their securities lending programmes. Further, providing detailed reporting in real time and customised lending and reinvestment guidelines enables clients the flexibility to tailor programmes that are suited for their risk tolerances. We have seen beneficial owners throughout the industry engage more and more in securities lending as they realise the potential of generating revenue on otherwise idle assets. In certain instances, this includes beneficial owners expanding their reinvestment guidelines in a risk-controlled fashion to maximise revenue.
You recently launched your sub-custody offering in the US—do you have any further plans in the US for this year?
The US is crucial to not only our clients’ strategic ambitions, but also our own. Launching our sub-custody product in late 2012 was a significant milestone for us, consolidating our global offering and making us a truly global custodian. The next steps include developing additional products to support our buy- and sell-side clients, including the launch of global custody in late 2013.
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