Revenue Recognition Challenges in an Uncertain Economy: Contract Modifications & Usage-based Pricing

Why is it important: A wind of change is sweeping across the securities finance industry, fueled by advancements in technology and the disintermediation of traditional securities financing models. Moreover, as the broader global market environment has matured, the real-world and regulatory capital costs associated with traditional securities financing are also becoming less commercially viable.

What your organization needs to consider: Securities financing market participants should consider the option of central counterparty (CCP) clearing. Depending on your organization’s circumstances, the benefits of CCP clearing can include:

  • Increased capital and balance sheet efficiency
  • Credit and systemic risk mitigation
  • Increased operational efficiency

Increased capital and balance sheet efficiency is achieved by allowing participants to offset any net obligations to the CCP. Additionally, participants may be eligible to lower certain risk-based capital charges with a CCP when compared to a traditional bilateral counterparty. This could result in increased capital and balance sheet headroom for your organization and therefore the ability to expand your lending/borrowing balances, ultimately leading to enhanced alpha.

Credit and systemic risk mitigation is achieved by the CCP becoming the legal counterparty and, in some cases, guaranteeing the return leg of the transaction.

Increased operational efficiency is achieved by the CCP “pairing off” new loans and returns in the same security, along with the daily mark to market.

So why now? It’s true that CCP clearing of securities financing transactions has experienced several false starts over the years as market participants were concerned by the margin requirements. However, the industry is under pressure to change and now could be the tipping point for the following reasons:

  • The need for further industry automation
  • Disintermediation of traditional models (peer to peer)
  • Traditional model capital cost is becoming less compelling
  • Counterparty default indemnification cost is becoming less commercially viable

Furthermore, industry giant Depository Trust & Clearing Corporation (DTCC) has announced that the SEC has approved the Securities Financing Transaction (SFT) Clearing Service proposal of the National Securities Clearing Corporation (NSCC), the equity clearing subsidiary of DTCC, to operate a central clearing and settlement infrastructure for overnight borrows and loans of equity securities.1

With that in mind, now is the right time to consider how your organization might benefit.

How we can help: FORVIS’ advisors can assist you with the analysis, design, and implementation of strategic changes to your securities lending infrastructure. We possess the product domain knowledge and industry experience to help you. Our services range from advice on how to account for centrally cleared transactions to advice on implementation of operating model changes. Our professionals are driven by shared passions to serve premier companies on financial services industry-leading projects, and we look forward to helping your organization achieve its goals.

Reach out to a professional at FORVIS or submit the Contact Us form below if you have questions.

  • 1https://www.dtcc.com/news/2022/june/02/dtccs-nscc-receives-sec-approval-to-provide-central-clearing-of-securities-financing-transactions

Related FORsights

Alert
Apr 15, 2022

Debunking ESG Myths

Some organizations have concerns about whether putting effort into ESG programs is worthwhile. Read on for a look at a few myths about ESG.

Read More

Let's Connect

Subscribe to our content or get in touch with us today

Subscribe Contact Us