- 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
Is the trend from active to passive management affecting securities lending? Is it causing active managers to relax their parameters?
Heatley: The thing about moving from active to passive is that the hunt for yield becomes more intense. Passive managers will typically lend – it provides a lot of their added edge.
Kiely: That’s an excellent point – it’s how they beat their benchmark. By their nature, passive-index programmes have fewer opportunities to lend deep specials. However, because they provide greater stability of supply, this obviously lends itself to the era of term financing that we are moving into. Passive funds particularly help in markets with high holdbacks or big buffers as – unless there’s a huge redemption or rebalancing in the index – they can lend more stock.
Heatley: Some large passive houses see it as such a high value activity that they conduct lending themselves, which introduces different challenges around operations and execution. How pragmatic they are in hugging the benchmark – do they rebalance today or another day, fully or partially?
Chessum: There’s a fundamental difference in mind-set. Passive managers, in my experience, love it. They are typically more open to any extra revenue they can add in a risk adverse way. Passive funds mostly trade at their specific valuation points. When you have a big rebalancing – especially in emerging or stickier markets – stock lending really lives up to the old adage of adding liquidity.
D’Eramo: The long-term investment style of a passive manager is very conducive to lending, especially for term trades. Value investors also hold big positions for a period of time based on fundamentals. For either, why not add a securities lending revenue stream?
What trends are you seeing in demand on the borrower’s side?
Kiely: Term, term and term. It is the big thing. Borrowers are also becoming more counterpart-sensitive, in terms of netting arrangements with certain jurisdictions and capital requirements for trading with certain types of beneficial owners. Borrowers are also engaging more, in terms of who they are borrowing from. If beneficial owners accept margin provided by way of a pledge rather than a transfer, there’ll be greater demand.
Arnesen: In fixed income, it is all about high quality liquid assets (HQLA). We are 100% lent in certain cases. Utilisation – in this case, not a bad thing – is the highest it has ever been. US Treasuries are as attractive as any asset class. US money market reform in October for floating NAV funds will be a challenge – but the spreads to government money market funds will be high so there is an opportunity. Returns in Asia blow away other regions, although volume is modest. However, in Asia you have to do your own homework, as there is no real pan-Asian forum.
Allen: I agree term and collateral are the two biggest trends. We have also seen increased demand in Asian markets where the return to lendable, when compared to the rest of the world, is significantly higher. Securities lending revenue generated by Asian markets rose from approximately $1bn in 2014 to $1.4bn in 2015.
Average fees across Asia were 97bps over the previous 12 months compared to 38bps in North America and 33bps in EMEA. In South Korea, average fees rose from 258bps to 357bps over the previous 12 months and from 150bps to over 200bps in Taiwan over the same period. The industry will be watching Asia closely to see how the market continues to evolve with a close eye on the sleeping giants of China and India.
Chessum: We’re seeing more specials and we’re seeing them last much longer. Commodity specials understandably seem to be lasting forever, which is really lifting our revenues.
D’Eramo: We definitely see non-cash collateral continuing to grow – the obvious driver is regulation around term trades and HQLA. There is continuously growing demand for the ability to do term. HQLA continues to be a very, very strong driver, whether for European or North American sovereigns. The other trend is around corporate actions. If there is an optionality element to the trade – the ability to get transparency into our engagement with the clients on certain optionality trades is a growing theme.
Does running a GC programme still make sense?
Kiely: GC has an important function. It oils the wheels of the machine. When lending was at its lowest ebb 18 months after the Lehman default there were definitely more failed trades and they failed for longer. The machine started to grind because liquidity was draining out of the system. It provides unseen aid that is often unappreciated.
Allen: GC plays a huge role in the US, and over the last two years it has trailed off only marginally. Currently, 81% of the US market is under 20bps, and in EMEA, more than 65% of trades are at that level. In Asia, there is a smaller percentage of trades under 20bps, while the mid-tier range of 20bps to 50bps is expanding.
Arnesen: If you want our HQLA, you are going to have to look at our GC. However, I shy away when the fee is modest and the collateral disadvantageous. I want our clients to have a positive experience. You have to service volume – there are corporate actions, marking to market and other considerations.
Chessum: GC will always exist and those with the widest parameters will make money out of it. Fund managers need it to shorten settlement dates when they’ve got redemptions. For passive managers it definitely makes sense.
D’Eramo: We can’t lose sight of the fact that GC it is a large source of liquidity for the market in general. It is also important for clients. the vast majority of which do not want to be an intrinsic value lender and just want to be able to improve where they can within GC. GC will continue to make sense – the discussions here are really around pricing and ensuring that the economics are aligned.