Axa IM talks of systemic risk from sec-lending limits

The global trading head at Axa's investments arm argues that exemptions are required to broad-brush transparency regulation to prevent a funding seizure.
Axa IM talks of systemic risk from sec-lending limits

Regulators’ broad-brush imposition of transparency disclosure requirements to include securities lending is disrupting market access to new funding channels and could cause systemic risk, warns Axa Investment Managers.

Christophe Roupie, global head of trading and securities financing in Paris, says he welcomes transparency rules, but believes regulators need to discriminate rather than impose broad-brush regulation on various market areas, from OTC derivatives, bonds and ETFs to sec-lending.

Reforms should include “appropriate calibration and relevant exemptions”, he argues, saying that at present they risk impeding market efficiency and influencing trading behaviour at a time when liquidity is flighty.

“For market efficiency and liquidity provision, you need to have a healthy repo [repurchase agreement] and securities-lending market,” he says. “Institutional investors’ inventories of securities need to be made available to liquidity providers.”

Roupie, who heads a team trading multi-asset classes amounting to €1.5 trillion a year, reckons sec-lending and repos have grown in importance amid regulations (Basel III, Dodd-Frank and European Market Infrastructure Regulations) that have crimped banks’ ability to warehouse and market-make on securities inventories.

“It is paramount that we preserve and encourage activities where you can find natural holders of positions, both for equities and fixed income, and ensure that those holders of positions are willing to lend to them via stock loans or repos,” he stresses.

Axa IM has been an advocate of sec-lending and repurchase agreements, despite the fact that the percentage of the global manager’s assets on loan remains single digit.  

Roupie says the European Securities and Markets Authority (ESMA) needs to provide clarity on sec-lending rules introduced last July for ETFs and Ucits launches, which require managers to return all sec-lending revenue to investors, net of operating costs.

He says ESMA needs to be more specific, especially on fees that can be paid to agent lenders acting on behalf of securities owners. “There is a limit to how many changes in business models you can ask for from the market, because in some cases such deadlines work against clients’ interests,” he says.

Sec-lending managers work with a model where clients and agent-lenders agree on fee-sharing percentages. More transparency in this area will mean a higher cost of compliance in terms of reporting.

Another concern is that under ESMA guidelines, cash collateral posted on Ucits funds in the context of sec-lending or repos will not be eligible for clearing under the European Market Infrastructure Regulations. This could create issues when it comes to collateral availability.

Meanwhile, Roupie says the proposed financial transaction tax (FTT) could also have a devastating effect on the repo market, as well as the real economy.

It is set to impose a 0.1% tax on stocks and bonds and 0.01% on derivatives if a transaction is deemed to have an established link to the “FTT-zone”, comprising 11 member states counting Germany, France, Italy, Spain, Estonia, Portugal and others.

The International Capital Market Association predicts that Europe’s short-term repo market could suffer a 66% contraction under FTT. As the ability to find funding through secured channels is crippled, systemic risk is heightened.

But while some industry participants expect FTT to be implemented across 11 European Union states by as early as 2014, others argue that its far-reaching impact means it will never get implemented due to opposition.

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