While peer-to-peer (P2P) lending has been discussed for a number of years, market participants highlighted that recently it feels as though “there’s actually some momentum behind it”.
This comment specifically comes from Christopher Benish, managing analyst at State of Wisconsin Investment Board (SWIB), who noted that his firm is “active engaged” in P2P discussions and actually trying to implement a better P2P model.
“I’ve been going to industry conferences for 14 years now and peer-to-peer has always been on the table but it feels different this time, it feels like there’s actually some momentum behind it. We have live trades on with peers, not just in the securities lending space but in repo lending and borrowing, etc. It has legs,” he said.
“We see it as having a lot of benefits in terms of alignment of interests and in terms of counterparty credit. There’s a diversification to including our peers as counterparties versus the traditional banks and broker dealers. I think they all probably have a place in the end, but peer-to-peer is something that we are very interested in and looking at in depth.”
Francesco Squillacioti, global head of client management for securities finance at State Street, echoed some of the comments from Benish, noting that P2P is a “great” platform to encourage diversification, while also being “another outlet for demand”.
He added: “Given the evolving securities finance discussion, I feel the time is right in terms of clients being more comfortable with this type of structure. From the standpoint of the beneficial owner or the underlying lender we’ve been working with, there’s been a period of gradually becoming comfortable with various types of lending structures and exposure.”
State Street launched its own P2P lending platform in October, dubbed Direct Access Lending. On the product, Squillacioti said: “What we sought to do was to make a model that, from the agent lending side and from the hedge fund side, looked as much like what they were used to as possible. So, a model where we’re providing additional lending opportunities while diversifying the risk and indemnifying it as an agent lender. From the hedge fund point of view, we aimed to provide the benefits of direct exposure to a beneficial owner, but through a managed platform that mitigated potential operational burden.”
However, while widely discussed in recent years, there are still many unanswered questions and complexities surrounding P2P lending, particularly with regards to its name, as pointed out by Elaine Benfield, senior counsel at Vanguard, who suggested re-branding the term “peer-to-peer”.
She stated: “The terminology suggests peer-to-peer is a mutual fund lending to a mutual fund or a hedge fund lending to a hedge fund, for example, whereas it could actually be a mutual fund lending to a hedge fund. The name could be particularly confusing for those not familiar with the securities lending industry. Is it not simply approving lending securities to new types of borrowers under existing agency lending programmes?”
However, Bill Smith, managing director, Americas sales executive at JP Morgan, underlined that P2P “means different things to different people”, noting that while the lending method has traction, it is still very much in the “formative stages”. He noted that there are existing ways for beneficial owners to expand their distribution network through their agent lender by using non-traditional borrowers, which differs from one pension plan lending to another pension plan, for example.
“The question I would have for beneficial owners is around the infrastructure they envision using for peer-to-peer. Do they see a market infrastructure built out and standardised to a point where it will be suitable to cover these activities, or do they expect to rely on their agents or existing infrastructures to change the way that they transact with borrowers, and potentially lenders, across existing platforms,” Smith asked.
However, Benish emphasised that beneficial owners have “a limited number of cycles” to spend on activities such as P2P, adding that he would rather focus on maximising the utility of his balance sheet and maximising how he funds and monetises his asset base.
“I don’t necessarily want to build out a securities lending infrastructure, I think that already exists in the market and it functions really well. My challenge to the traditional lending agents of the world is how to best integrate new participants and new counterparties that perhaps want to participate in a different way than they have in the past, how to best be that infrastructure for those who want to trade with each other,” he explained.
However, in response, Smith noted that this agent lenders are viewing this challenge “as an opportunity”. He underlined that there are already existing platforms to match firms that are long cash investors who want to do repo with money funds directly, and there are also fintech firms that are developing platforms to match borrowers and lenders.
“Ultimately, it’s going to be a question of how can you get access to safety and scalability through a suitable platform’s infrastructure. If you don’t want to develop the back or middle office to facilitate peer-to-peer lending, then you might want to use an existing platform that gives you access to the names that you would choose to have as counterparties, and may even bring you names you didn’t know might qualify as counterparties down the road,” he concluded.
These comments have been taken from Global Investor’s US Beneficial Owners Roundtable, held in New York in December. The discussion features in the Beneficial Owners Supplement 2020.
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