Securities Financing & Collateral Management

Euromoney Learning Solutions

How long?

  • 3 days
  • in person

What are the topics?

Euromoney Learning Solutions

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Who should attend

This course has been designed for anyone who wishes or needs to know about securities lending, the repo markets and collateral management including:

  • Senior and middle management in financial services
  • Operations Managers from investment banks, broker/dealers, prime brokers, fund managers, pension funds etc.
  • Pension Fund Trustees
  • Middle Office and Risk Managers
  • Treasurers
  • Product Controllers
  • Internal and External Auditors
  • IT developers (focused on operations or Securities Financing)
  • Business Analysts and Consultants
  • Compliance staff
  • Regulators
  • Graduate and Management Trainees

About the course

A thorough guide to participants, trade structures & collateral arrangements in SFTs

A thorough guide to the market participants, the trade structures, collateral arrangements and risks in securities finance transactions (SFTs) including securities lending and borrowing and the repo markets and the importance of the collateral management function in international capital markets.

Attend this intensive and highly practical 3-day course and learn:

  • The drivers and mechanisms of international securities finance transactions (SFTs) that includes the securities lending and repo markets
  • Who are the lenders, the intermediaries and borrowers and how they operate
  • The economics and benefits of lending
  • The economics and benefits of borrowing
  • The trading strategies and pricing mechanisms
  • The life cycles of lending and repo transactions
  • SFTs in ultra-low (or negative) interest rate conditions
  • How dividends and other corporate events are impacted by lending and repos
  • How to identify potential risks and understand the control measures to prevent them
  • What are the automated platforms and market initiatives
  • What collateral is accepted and how it used
  • How balance sheets are leveraged and the benefits and risks of leverage
  • Collateral and derivatives
  • The collateral management processes including bi-lateral and Triparty arrangements
  • The mark to market (MTM) process and the mechanisms for managing collateral
  • The collateral and counterparty risks
  • The importance of the collateral management function in today’s financial markets including the collateralisation of OTC and exchange traded derivative transactions
  • The impact of regulation and the concerns of the regulators

COURSE BACKGROUND

This course focuses on the international securities borrowing and lending and repurchase agreements (repo) markets and collateral management. Its practical approach will provide you with an insight into how financial institutions lend and borrow securities, utilise repos as well as the collateral management processes that are required to support these activities. You will be given a thorough and clear understanding of how these markets operate, the risks involved, the economics of securities financing transactions (SFTs) and the administration and IT infrastructures required to support and control them. You will gain working knowledge of the life cycles of securities lending and repo transactions. The course will also explain the growth and vital importance of SFTs in the international financial markets. It will explore how these activities can improve market liquidity and be a benefit to the profitability of all parties involved. The use of collateral in derivative transactions and the changing regulatory environment and its impact on securities financing will be discussed.

TEACHING METHOD

The teaching methodology used on this course combines formal theoretical instruction with frequent use of exercises and case studies. These are based on real situations experienced by the course director in his over forty-year involvement in this business. The course is intended to be practical and interactive, with delegates encouraged to ask questions throughout. The course content is intended to give delegates an understanding that will be of immediate practical use in the workplace. The lecturer will be available throughout the duration of the course to offer additional help if required. Delegates will be divided into to small teams to work together on the exercises that will include some simple calculations.

Agenda

Day 1

Securities Lending and Borrowing (SL)

Introduction to Securities Lending

  • Background and historical context of the securities lending market
  • What is securities lending?
  • Why it is important

Securities Lending Market Participants

  • Who are the lenders?
  • Who are the borrowers?
  • Who are the intermediaries?
  • Securities lending in the US, European and Asia pacific markets

The Economics of Securities Lending

  • How the lender benefits
  • How the borrower benefits
  • How the intermediary benefits
  • Cash versus non-cash collateral
  • How fees are calculated
  • Pricing-‘Specials’ versus General Collateral ‘GC’
  • Margin (or ‘haircut’) requirements

Case study: Calculating fees on SL trades Exercise

Corporate Governance and Securities Lending

  • The beneficial owner
  • Authorising securities lending
  • The legal position and documentation
  • Lenders rights
  • Voting

Case study: How the use of SL can be abused-The Maxwell case

What Creates the Demand for Securities Lending

  • Trading strategies
  • Short selling
  • Arbitrage
  • Fails management

Case study: Security borrowing to facilitate a convertible bond arbitrage

Day 2

Life Cycle of a Securities Lending Transaction

  • Striking the deal
  • Booking the deal
  • Confirmation
  • Settlement
  • What happens if the transaction fails
  • Recall and termination
  • Billing
  • Systems and administration

Exercise: Fails management and borrowing. Using a broker/dealer fails report; we will determine securities borrowing requirements

  • Overview of Securities Lending Trading Platforms
  • Electronic trading platforms
  • How do they work
  • The benefits

Automatic Lending and Borrowing

  • Who offers the service
  • What are the benefits
  • Why it needs to be managed

Case study: Automatic borrowing going wrong

Dividends and Corporate Actions

  • How are corporate actions treated in an SL transaction
  • Voting

Case study: Empty Voting-Henderson Land

What are the Risks in Securities Lending and Borrowing?

  • Borrower risk
  • Collateral risk
  • Cash collateral risk
  • Intra-day settlement risk
  • Operational Risk
  • Legal risk
  • Reputation risk
  • Recall failure
  • Buy-ins

Case study: What happens when you cannot return borrowed securities – a buy-in

Repos

Sale and Repurchase Agreements (Repos)

  • Background and historical context of the Repo market
  • Reasons for the growth of the market

Exercise: Calculate the cost of shorting the fixed income bond positions listed

The Market Participants

  • The borrowers (or sellers) in a repo
  • The investors (or buyers) in a repo
  • The brokers
  • Repos in the US, European, Asia Pacific and emerging markets

Types of Repos

  • The ‘classic’ repo transaction
  • A reverse repo
  • A sale/buy back (buy/sell back)
  • Difference between repos, sale/buy backs and SL

Why are Repos Used

  • Benefit to the seller
  • Benefit to the buyer

Terms of Repo Transactions

  • Open repo
  • Overnight repo
  • Term repo
  • Repo rates and how they are determined

Exercise: Using a dealers trade sheet decide repo and Securities borrowing requirements

Day 3

Repo Agreements

  • Bi-lateral repos
  • Hold in custody (HIC) versus delivery repo
  • Tri-party repos
  • Who provides tri-party arrangements
  • Equity repos

What are the Repo Dealing Risks?

  • Counterparty/credit risk
  • Collateral/issuer risk
  • Market risk
  • Operational risk
  • Legal risk
  • Stock specific risk
  • FX risk

Exercise: As Pension Fund Trustees, you have been asked to consider lending of the Funds securities assets. What questions should you ask?

Collateral Management

What is Collateral?

  • Background and historical context of collateral
  • What constitutes collateral in financial markets
  • Collateral management since the banking crisis
  • Leverage and the Basel Accord
  • How leverage is used, its benefits and its risks
  • Products supported by collateral
  • Exchange traded derivatives and collateral
  • OTC derivatives collateral

Collateral Usage

  • Cash versus non-cash collateral
  • G10 government securities
  • Other collateral
  • The ISDA collateral survey
  • Collateral Support Annex (CSA)

Collateral Management Infrastructure

  • In-house versus vendor solution
  • Documentation and legal agreements
  • Bi-lateral and Triparty arrangements
  • Who provides the Triparty solutions
  • Central counterparties (CCPs)
  • Dodd-Frank and EMIR
  • How do the CCPs operate

Managing Collateral

  • Agreeing a collateral schedule
  • Agreeing a margin threshold
  • Calculating margin
  • Mark to market
  • Haircuts
  • Regularity of margin calls
  • Monitoring and reconciling collateral receipts and deliveries, custody and settlement
  • Substitutions
  • Collateral arbitrage
  • Dealing with coupon interest and corporate actions

Case study/exercise: Drawing up a collateral schedule

Collateral Risk

  • Operational risk
  • Market risk
  • Concentration risk
  • Legal Risk
  • Valuation risk
  • FX risk
  • Increased overhead

The Impact of Regulation and the Concerns of the Regulators

  • Indemnification
  • Re-hypothecation
  • Opacity
  • Connectivity
  • Settlement efficiency
  • SFTR (Securities Financing Transactions Regulation) and transaction reporting

Experts

Richard Foster

The instructor has over thirty-five years senior banking operations management experience. He has been Head of International Operations at tier one firms including Morgan Stanley, Merrill Lynch and Prudential Securities. He was COO at Cresvale, an equity derivatives trading firm and a Founder Par...

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Securities Financing & Collateral Management at Euromoney Learning Solutions

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