Finadium Research Report

Capital Charges for Margin, Securities Lending and Repo: A Guide for Banks, Their Clients and Counterparties

Finadium
October 2011

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As the regulatory playing field becomes clearer, banks are beginning to adjust their policies and procedures to account for new capital requirements. While these requirements boil down to more expenses for market participants, traders at banks, hedge funds, insurance companies and other investment firms can help themselves by understanding the new capital rules and working to adjust their strategies to reduce costs.

The new regulatory system will have room for adjustments like any system before it; the sooner that market participants understand the variables, the faster they will be able to take more control for themselves, their clients and their counterparties. While rules for capital charges continue to evolve, it is certain that securities finance will be heavily impacted. The details behind new capital charges show that managing capital costs is possible but will require an effort.

In this report, Finadium presents the new capital charges that will affect the US and European securities finance business both now and in the years ahead. Our review is drawn from the major financial regulations and recommendations outstanding in the US and Europe and from our own conversations with market participants about their internal expectations.

This report has been written for the bank principal desk professional needing a summary of the major terms and topics for engaging with clients and counterparties, and for their clients when negotiating with service providers. Counterparties will also benefit from a greater understanding of the needs of banks today. The report includes ideas and strategies for cost mitigation in the new regulatory environment.

This report is 28 pages with 4 exhibits.

TABLE OF CONTENTS

        ■    Executive Summary

        ■    The Emergence of New Capital Charges

        ■    What "Capital" Means Now for Securities Lending and Repo
                  –   Defining Capital

        ■    The Capital Charges and Their Immediate Impacts
                  –   Changes in Bank Business Models Reflect
                       New Capital Demands

        ■    Strategies for Capital Cost Management
                  –   Outstanding Business

        ■    About the Author

        ■    About Finadium