- Alastair O’Dell, editor, Global Investor/ISF
- Naomi Heatley, DC product manager USS Investment Management
- Matthew Chessum, investment dealer, Aberdeen Asset Management
- Fuad Ahmed, investment management executive, Phoenix Group
- John Arnesen, global head of agency lending, BNP Paribas Securities Services
- Don D’Eramo, managing director, head securities finance, RBC I&TS
- Stephen Kiely, head of new business development, securities finance, EMEA, BNY Mellon
- Nancy Allen, director, DataLend Product Owner
Alastair O’Dell: How can beneficial owners maximise value from their lending programmes? What can they do and how can agent lenders help?
Stephen Kiely: With all the dynamics – intuitive fee splits, partial indemnification, CCPs, cash reinvestment and treating collateral as an asset class – it’s a challenge. They need to understand that there is more than one price for nearly every service, depending on how they take that service. It now involves a lot more oversight and involvement.
Nancy Allen: Beneficial owners are engaged with us on a regular basis. They are fast becoming our most active clients. To optimise returns, beneficial owners need to clearly define their risk profile and work with their agent lenders to structure the programme within those parameters.
They need to understand market trends, from collateral and term trades to entering new markets, and be able to quantify the returns from these opportunities. Agent lenders and beneficial owners alike can benefit from performance measurement tools such as the DataLend Client Performance Reporting suite to help identify trends in the market and quantify returns from a change of strategy.
Matthew Chessum: We don’t do anything on term as we’re UCITS-only but we looked at two main ways to increase revenue – subtly changing our collateral profile and our buffers. Instead of a generic 20% buffer, our agent examined our trading patterns and worked out the average percentage of a holding sold then factored in market risk to derive a buffer to cover most sales. By having more stock available, we’ve generated more revenue.
John Arnesen: We sit down with beneficial owners and go through both the assets they have and the assets demanded in the market – before discussing their risk profile. It is a low risk activity but the beneficial owners have to be fully engaged and understand dialling risk up and down, as market dynamics are shifting exponentially. It’s not for everybody anymore.
Don D’Eramo: It’s about the client experience. It’s incumbent on us to engage and ensure that clients understand changes in demand, whether collateral profiles can be improved – if the client is looking to optimise in that sense – or any other enhancements made. Everyone has different goals, which leads to different styles. Some may just want to look at intrinsic value and tend towards specials-only, others may want to optimise GC.
Fuad Ahmed: We’ve become a lot more engaged. Previously, we outsourced overseeing it to an investment manager but now we take a hands-on approach. This sits within the investment office whereas, historically, it was a back office dialogue. We want to understand what drives revenue. We want a low risk strategy but one able to generate a significant return for our policyholders.
Naomi Heatley: We use agent lenders and the function overseeing it sits in the front office. It’s enabled us to use our risk budget differently. Last year we took away cash reinvestment from our agent lender and put it with one of our cash managers. We felt it would be able to use the guidelines more flexibly, taking more or less risk depending on events. The yield on that portfolio is now on average five times higher.
We would never view cash collateral as operating cash – it clearly doesn’t belong to us – as we are just safekeeping it. We just felt that there are experts that can do the job better for us.
Arnesen: Another issue is the extent the programme’s assets are already overwhelmingly supplied. How can I maximise returns, if at all? What’s the fair allocation dynamic? These questions are increasingly coming up.
If I were a client, the first question would be ‘If you already have the same assets that I have I’m just diluting for the rest of your clients, how are you going to allocate?’ How clients are treated fairly is a challenging question, as it is not easy.
Kiely: One common question is whether the fair allocation algorithm still exists. The answer is yes – but there isn’t one bucket anymore, there are a number of buckets.
Each one contains clients with similar characteristics – most importantly collateral parameters and acceptance of term but also tax rates and buffers. Beneficial owners can make their assets more attractive by changing buckets.