THOUGHT LEADERSHIP
The evolution of the stock loan industry
Matthew Wolfe and Oberon Knapp from the Options Clearing Corporation (OCC) look at the evolution of the stock loan industry. Matthew Wolfe is executive director, Renaissance clearing at OCC. He starts by recalling what the stock loan industry looked like when OCC created the stock loan programme in 1993. “Market makers managed risk in their options positions through buying and selling stock or by lending and borrowing to hedge that exposure,” he explains. “However, back then we didn’t have visibility into the loans and the borrows, and we had a couple of situations where we discovered the risk in the market maker’s account would not have been as high had we known about their stock loan positions.” Hence the name hedge - OCC treated it as a programme for those market makers to register their loans and borrows as a hedge against their options positions.
“What was happening in the build up to the financial crisis was that firms were reaching their risk limit with counterparties and found that their internal risk management teams were much more willing to let them trade larger sizes if OCC was the counterparty. “There was another fundamental shift that happened post Dodd-Frank and Basel after those regulations introduced requirements for regulatory capital and incentivised clearing. Firms had greater requirements to post capital which ate up a lot of their balance sheet, so they came to OCC more so for our 2% risk weightings, which was another accelerator in the growth of our programme.” What have you had to do in terms of changing your offering/strategy in the market? “Our system and how we approached it naturally allowed that migration to occur with no real changes on our part. We were becoming the borrower to the lender and lender to the borrower from day one, so that credit disintermediation always existed - it just wasn’t the primary factor. “Then post-Dodd-Frank the regulators imposed the 2% risk weighting for CCPs, so it was just in the calculation of the firms’ regulatory requirements and we didn’t have
From your experience working with the firm, what have been the key development/ evolutions in that service? “It started as a risk management tool and in the years leading up to the financial crisis, we started to see balances growing much faster than they had previously. One of the primary motivations for that growth was credit disintermediation, where OCC steps in and becomes the counterparty, the lender to the borrower and the borrower to the lender.
Securities Finance Americas Guide 2022
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