Regis Lavergne, global head of equity finance
How is the business at Natixis organised?
Lavergne: Natixis is the corporate, investment, insurance and financial services arm of Groupe BPCE, the second-largest banking group in France. This provides us with a strong credit rating and balance sheet, a global network and a highly visible brand.
The equity finance business that I lead incorporates three activities – stock lending, collateral management and forward trading. We have a global footprint with dedicated staff in Paris, New York, London, Hong Kong, Tokyo and Frankfurt.
We target a high level of interaction among the three regions, both from a coverage and product perspective. One of our competitive advantages is that our desks price and transact across regions and products nimbly.
We are very responsive in providing optimal customised solutions, and best pricing, for structures which may include securities from multiple underlying countries or incorporate multiple products.
Dennis Shikar, head of equity finance Americas
Shikar: With regards to our internal architecture – the fluidity across regions and between products enables us to provide better results for our clients. We are able to source, coordinate and optimise the solutions to best fit the structures we have customised.
For example, a multiple-legged securities lending trade, with underlyings from multiple countries, could be enhanced by sourcing or refinancing coll atera l from multiple regions and via multiple products.
Lavergne: The way we are organised enables us to respond and innovate, but also to design and deliver more elegant solutions. We stay closer and more accessible to our clients, so that we have a clear idea of what they need and can ensure that our products are a close fit.
Our clients also benefit from the ideas we provide through our financial engineering and structuring expertise.
Give an example of how you have changed your service to apply this principle of customised service.
Shikar: Years ago we reorganised our equity finance business, focusing entirely on serving our client needs in one uniform offering, regardless of region or the underlying currency of the flows. We dedicate our resources to provide optimal solutions for our clients.
In the recent past, we launched our Natixis Synthetic Services (NSS) product, which bundles synthetic exposure, market access, leverage and financing in a portfolio swap format, and offers consolidated performance reporting.
Our clients have responded strongly to our offering, which combines a broad product mandate and creative engineering to tailor solutions.
We trade bespoke structures on varying maturities, on multicurrency and multi-country underlyers.
Lavergne: We have further developed our product line serving the US insurance markets. Historically, when meeting regulatory capital requirements, US regulators accepted letters of credit from insurers.
As the regulatory environment evolves, regulatory capital definitions and reserve targets have morphed as well.
We leverage our collateral management and forward trading expertise, coupled with our knowledge of the regulatory landscape, to structure securities-based collateralised solutions for the insurance industry.
These solutions help our US insurer clients to address new regulations on collateral reserve requirements and to optimise costs. We entered this market nearly four years ago, and we are very much at the forefront in this space.
To reiterate the point about our global reach – we can source collateral from New York, Europe or Asia, with longer durations and longer tenors, and price it attractively, while meeting regulatory requirements.
Moreover, we optimise the liquidity coverage ratio (LCR) and minimise balance sheet consumption.
Summarise the impact of LCR and the leverage ratio on securities lending markets.
Lavergne: In our equity finance business, we are seeing a shift to securities-versus securities transactions, rather than the historical focus on cash business.
Our clients are asking us to help them better utilise balance sheet assets and improve the quality of collateral.
We look at how, without employing cash, we can provide the desired LCR relief. Internally, we have the same objective – to optimise our balance sheet for both regulatory and financing purposes.
Shikar: As the regulatory environment continues to evolve, we have seen a number of clients becoming more aggressive in seeking opportunities to decrease balance sheet consumption, and identify customised financing solutions.
As the pressure mounts to decrease dependencies on short-term financing, all counterparties and clients subject to the regulations have been extending the profile of their funding curve.
We have also seen an increase from our client base to source long and short financing synthetically, via CCPs and collateral upgrades, as opposed to traditional cash repo and SBL structures.
We expect this trend to accelerate as the operating businesses prepare for full implementation of the leverage ratio while balancing the needs for the LCR.
Lavergne: Our global business model has always been focused on extracting optimal returns on our balance sheet and cash envelopes, with a keen eye on funding gaps and liquidity dependencies.
The broader market is shifting in this direction, and we are aggressively pursuing strategies that offer relief for those subject to the regulations, and additional portfolio yield for those that have additional capacity.
How far has recent regulation changed the nature of the collateral upgrade trade?
Shikar: Over the last 15 years in the US, interest in the classic upgrade trade/asset switch has increased substantially. It has evolved from a traditional upgrade, which typically comprises embedded financing of long and short positions tied to a range of underlying securities, to one designed to accommodate LCR requirements.
The term of the financing has extended, moving beyond the overnight market to varying maturities. In turn, this has required more active and flexible management of long and short collateral. These new regulations pose a challenge to the market.
Lavergne: Again, the flexibility of our team provides a benefit when it comes to bespoke upgrade trades. We have traditionally provided solutions such as stock borrow, repo, and collateral upgrade trades.
As we do not have a prime brokerage business, we can focus on being more nimble and providing complex, tailored solutions for our clients.
Leveraging the expertise of our forward trading team, we bundle traditional upgrade trades with longer duration to meet our clients’ needs for LCR.
What effect will the advent of CCPs have in this space?
Shikar: I think the advent of CCPs is an important shift – the benefits they provide are a big incentive. They provide credit diversification, potential reduction of risk weighted assets and balance sheet netting opportunities.
We are seeing increased client requests to clear negotiated transactions through CCPs, and expect this to continue to grow as the scope of the regulations widens.
We have traditionally positioned ourselves as flexible in the form of financing, dynamically rehedging our portfolios, alternating between cash and synthetic products. Increasingly, for cash financings trading via the CCPs will become the norm.
Lavergne: You are seeing this trend globally in the CCP functionality provided by firms like the Eurex CCP in Europe and the OCC in the US. In fact, we were the first French bank to sign up Eurex’s facility.
To the user, there are a lot more benefits, including greater liquidity, as you are facing an organisation of stronger credit quality than your counterparty on the underlying trade.