Has the time finally arrived for a CCP to get a permanent securities-financing business going? On the back of its existing cash-equities clearing and CSD connections across 19 European countries, Cboe Clear Europe now places a big bet that it has. The company today announced its plans to offer lenders and borrowers of shares and ETFs a new CCP service, with a start in the third quarter of 2024. PostTrade 360° speaks with head of product development Jan Treuren. 

“We’re trying to make the process as straightforward as it can be. We will handle the matching of the transactions between borrowers and lenders and provide end-to-end management for the post-trade lifecycle events,” says Jan Treuren, head of product development at Cboe Clear Europe. 

His company’s new push in the securities financing space was announced in a news release on Wednesday morning. Among the participants, it names BNY Mellon and Citi on the agent lender side, and borrowers including ABN AMRO Clearing Bank, Barclays, Citigroup Global Markets, J.P. Morgan and Goldman Sachs.

PostTrade 360 Nordic 2024

The easy bit about central clearing for securities financing transactions (SFTs) is to see that it makes intuitive sense. Asset owners across the world hold trillions of euros in European shares and ETFs which are “lendable”, but with only single percentages of these actually being lent. The party that “borrows” the security will pay a total lending fee with a yearly rate typically at some tenths of a percent (so tens of basis points); more if a security is hard to borrow. Net of operational costs, and commission to agents between the lender and borrower, the untapped possibility to earn lending fees on these could still generate an additional layer of return-on-assets that is too big for many asset owners to ignore. A CCP should take some counterparty risk and bilateral hassle out of the equation, and enable those valuable lending volumes to grow, right? 

So far, the easy part. The tricky bit … is to make it happen. 

Liquidity has been a challenge

Indeed, it has been tried and pulled back. This four-page article (seemingly Eurex-sponsored, from early 2018) in the Securities Lending Times, shines light on the intricate pros and cons that stakeholders need to address, as they consider hooking up to a central counterparty to replace their previously bilateral post-trade relations which result from their securities finance transactions. 

In the column of positives, we find the prospects of cross-product netting, better counterparty credit quality, and operational efficiencies. But the onboarding can be challenging, and the broader industry-level benefits could be too distant into the future for market participants to want to invest in the implementation today. Deutsche Börse-owned clearinghouse Eurex patiently pursued its Lending CCP initiative through the 2010s, and announced its first buy-side client to go live in 2018, but eventually decided in 2021 to close the venture. And Cboe Clear Europe itself (then EuroCCP) put the idea on ice for some years after first exploring it around 2016–18, as Brexit was causing uncertainty and other mandatory projects such as SFTR competed for priority. 

Majority of market backs it

Against this backdrop, it seems wise that Cboe Clear Europe has been in close dialogue with market actors before deciding to go for it this time. A stakeholder group is involved, representing the majority of the volumes in the market, Jan Treuren reckons. A “phase 1 model” has been agreed, and so have mutual commitments to boost the early progress. 

One driver behind the market participants’ growing interest in a CCP solution, is that the regulatory capital requirements for bilateral transactions will be stepped up with the Basel IV framework that comes into play at the start of 2025. Limitations on single-counterparty credit is another driver. 

Different enough this time?

Jan Treuren highlights design features that he hopes will play to his company’s advantage. The match with the existing pan-European equities-clearing setup is obviously at the heart of the solution. 

“So, the transactions themselves will be managed between lenders and borrowers, and their post-trade service providers. But the actual movements of securities and cash will use our existing CSD connectivity network across Europe,” says Jan Treuren. 

Direct connections with CSDs in 19 markets can be leveraged, and the broad market scope could help crack the liquidity nut. Equities and exchange-traded fund holdings (ETFs) will both be possible to lend, and the counterparties can use several types of assets as collateral with the CCP to cover their positions: equities, ETFs, government bonds, and corporate bonds. 

In the securities lending market, the side that borrows a security will often be fronted by an investment bank that is managing inventory on behalf of actors such as market makers and hedge funds. On the lender side, it is often the large custody banks that play the agent lender role, on behalf of beneficial owners such as pension funds and others who tend to hold long positions over long time.