Thomas Halikias of Saratoga Capital looks at single stock futures and their usage in securities financing. Single stock futures can be used to finance long equity positions or lend underlying stocks, and offer benefits over traditional OTC products like improved capital requirements and price transparency. While initially seen as speculative, single stock futures are actually sophisticated financing instruments that provide benefits to international holders of US equities by reducing dividend withholding tax exposure.

1. IndustryOpinion
Single stock futures… a new dawn
Saratoga Capital’s Thomas Halikias looks at single stock futures usage
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INDUSTRY OPINION
In our work, promoting exchange listed single tle uses of single stock futures can be easily institution would perform a similar simultaneous
VWRFN IXWXUHV DV D ¿QDQFLQJ RU VWRFN OHQGLQJ ID- overlooked. Additionally, trading single stock equity for future EFP, but in this case the pricing
cility, Saratoga Capital’s success in introducing IXWXUHV GRHV QRW VSHFL¿FDOO UHTXLUH &RP- differential would be based on the market rate
the product has been predicated on our ability modity Future Trading Commission (CFTC) for borrowing the stock. In both transactions,
to clarify clients’ misconceptions regarding the registration—exemptions are available for the institution would select the appropriate fu-
single stock futures market. Initial responses most equity based strategies. ture expiration cycle to match their desired time
include: IUDPH IRU ¿QDQFLQJ RU OHQGLQJ WKH VHFXULW
‡ “Futures? We don’t trade futures.” Single stock futures can be packaged against
‡ “Single stock futures? They don’t seem WKH XQGHUOLQJ HTXLW WR HLWKHU ¿QDQFH D ORQJ While transactional volume on the OneChicago
very liquid.” equity position or to lend the underlying equity continues to grow; the exchange saw record
‡ “How do single stock futures minimise our to parties interested in obtaining the long shares volume this March—the ‘shadow liquidity’ in
US withholding tax?” for an extended period of time. For example, if WKH ¿QDQFLQJ RU OHQGLQJ PDUNHW LV H[WUDRUGLQDU
DQ LQVWLWXWLRQ ZLVKHV WR ¿QDQFH D VSHFL¿F HTXLW Saratoga Capital has direct access to billions of
The product’s unfortunate association with position, they would sell the underlying equity GROODUV RI EDODQFH VKHHW IRU ¿QDQFLQJV DQG IRUH-
speculative trading strategies often found in il- simultaneously with the purchase of the equity’s sees the size of capital available for these trans-
OLTXLG FRPPRGLWLHV KDV EHHQ D VLJQL¿FDQW EDU- single stock future. This simultaneous transac- actions to swell in the coming months. As the
rier to extolling the many virtues of this sophis- tion is called an exchange for physical (EFP) market develops, the notional volume of lending
WLFDWHG ¿QDQFLQJ DQG VWRFN OHQGLQJ LQVWUXPHQW and bears absolutely no directional market risk. transactions should also continue to grow. In
While customers can and do trade single stock The pricing differential is based solely on market the three years of trading single stock futures,
futures in a speculative manner, the more sub- ¿QDQFLQJ UDWHV )RU D OHQGLQJ WUDQVDFWLRQ WKH ZH KDYH VHOGRP H[SHULHQFHG DQ LVVXH ¿QGLQJ
20 www.securitieslendingtimes.com

2. IndustryOpinion
liquidity for our client’s trades. ers of US equities is that utilising single stock Utilising single stock futures also conforms to
IXWXUHV FDQ GUDPDWLFDOO UHGXFH D ¿UP¶V 86 the intent of Congress’ 2010 Dodd-Frank Act.
2QFH 6DUDWRJD DSLWDO¶V VWDII KDV FODUL¿HG WKHVH dividend withholding tax exposure. Portfolio
future and liquidity concerns, we are then able PDQDJHUV FDQ ¿QDQFH KLJK LHOGLQJ 86 HTXLWLHV Once clients understand the many virtues of sin-
to discuss why single stock futures are a viable and improve net equity and portfolio retentions gle stock futures, they almost universally want
alternative to products already available in the considerably. The US Treasury’s 19 January to learn more about the product. Like most new
VHFXULW ¿QDQFLQJ RU VWRFN OHQGLQJ PDUNHW 7KH 2012 proposed legislation regarding dividend products, implementing a single stock futures
two major attributes of single stock futures are equivalents implies that single stock futures 1C trading platform takes some time and internal
WKH OLVWHG QDWXUH RI WKH SURGXFW IRUWL¿HG E WKH contracts, priced with an implied estimated divi- organisational approval and support. However,
AAA rated Option Clearing Corporation’s (OCC) dend, will not be withheld as a dividend equiva- once all in-house requirements have been sat-
explicit delivery guarantee, and the wide diver- lents. We believe this ruling leaves single stock LV¿HG WKH DFWXDO WUDGLQJ DQG FOHDULQJ RI VLQJOH
sity of market participants able to transact via IXWXUHV DV WKH PRVW HI¿FLHQW WRRO IRU RSWLPLVLQJ stock futures is relatively simple.SLT
the OneChicago exchange. The diversity of par- off-shore US equity portfolios. Saratoga Capital
ticipants and their accompanying institutional KDV VHHQ VLJQL¿FDQW LQWHUHVW LQ WKLV DVSHFW RI WKH
VWUHQJWKV FUHDWHV IRU DQ H[WUHPHO HI¿FLHQW PDU- market and we expect to see more large Euro-
ket framework. The OCC guarantee enables pean, Canadian and Asian institutions transact-
large institutional cash managers to seamlessly ing single stock futures shortly.
fund small or poor credit quality entities or for
large position holders to monetise equity hold- In our conversations with clients, we tend to fo-
ings for an extended period of time without con- FXV RQ WKH TXDQWL¿DEOH DWWULEXWHV RI VLQJOH VWRFN
cern for counterparty credit lines or documenta- futures for front line traders or position manag-
tion requirements. Additionally, the opportunity to
ers. These individuals tend to focus on pricing,
pair up naturals—two counterparties with offset- FRXQWHUSDUW ULVN DQG JURXS RU GHVN SUR¿WV
ting exposures—further improves market pricing. However, single stock futures offer an array of
An example of a natural transaction would be RUJDQL]DWLRQDO EHQH¿WV WKDW PLJKW QRW EH D SULRU-
WKH ¿QDQFLQJ RI DQ HTXLW WKDW LV LQYROYHG LQ WKH ity to desk heads or portfolio managers. These
Thomas Halikias
purchase of another listed company. Under such EHQH¿WV LQFOXGH LPSURYHG %DVHO FDSLWDO UHSRUW-
a scenario, a merger arbitrageur would actually ing due to the superior credit rating of the OCC
Managing director
Saratoga Capital
receive payment for borrowing the security he compared to traditional OTC counterparts and
needs to short for the arbitrage. The joining of exchange listed price transparency that is eas-
WKH ¿QDQFLQJ DQG OHQGLQJ IXQFWLRQ LQ RQH PDUNHW ily incorporated into standard risk metrics and
improves the pricing for all participants. allows organisational risk managers to properly
identify and calibrate the exposures inherent in
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