Optimised collateral management and securities financing is moving ever closer to the centre of treasury, trading, risk and operations activities for fund managers and insurers globally. This has certainly been the case for Mick Chadwick at Aviva Investors, who oversees securities lending, repo and related transactions in both fixed income and equity markets on behalf of all entities of the global insurance giant Aviva.
“As a securities finance desk, our mandate is now two-fold,” he explains. “On the one hand there’s our traditional securities lending function, unlocking maximum value out of assets, which remains important. However, in order to do that effectively and with maximum efficiency, we’ve had to develop significant expertise and invest in infrastructure around collateral management.
“We’re increasingly being called upon to leverage that expertise for the benefit of other parts of the firm. It’s an evolution, or extension, from a traditional securities lending mandate to an all-encompassing collateral solutions provider to the wider business.”
Chadwick’s team of twelve includes traders, operational support and control staff working closely, looking after the full lifecycle of securities finance transactions across fixed income and equities for a number of funds run by Aviva Investors, as well as the wider insurance group’s pension fund and all other Aviva units engaged in lending and borrowing.
The sheer scale and diversity of strategies and risk appetites of Aviva-owned entities means the firm’s securities finance desk is no less sophisticated than other agent lenders. Although Chadwick and his team aren’t aggressively pitching for third-party mandates on a standalone basis, there remains a meaningful book of external business, which is usually embedded as part of a broader Aviva Investors mandate.
This means the unit is also alert to the full range of wider industry trends and revenue generating opportunities. “There’s a certain bifurcation going on within the securities finance industry,” explains Chadwick.
“On one hand you have the collateral transformation business, where participation levels are high from funds invested in high-quality liquid assets. For that approach to be successful, funds need to be flexible around term structures as well as collateral criteria – but not all funds have the appropriate risk appetite or liquidity profile and others are simply not permitted by regulation to participate in that activity.
“At the opposite end there is an ongoing focus on specials, a lower-volume yet higher margin business where strategies focus on a specific security or event.”
Chadwick argues that his unit has somewhat of a competitive advantage, given that it is run out of an asset management business. “We have a direct relationship with the decision makers of the underlying funds and can be nimble when it comes to things such as corporate actions and event-driven trading opportunities. There’s a high level of coordination, which allows us to move more quickly than some of our peers in the custody universe.”
Before starting at Aviva Investors in 2006, Chadwick spent most of his career as a borrower in the fixed income markets, working for various investment banks, building and running repo desks for Lehman Brothers, UBS and HBOS Treasury Services. Although regulatory reform and technical innovation have been ever-present during that time, Chadwick acknowledges that the pace of change is demanding on market participants and certainly paves the way for new ways of doing business.
Whether that’s more CCP adoption, peer-to-peer lending, a reliance on synthetics or a mixture of each remains to be seen. Chadwick says all of these initiatives tend to be driven primarily by the sell-side and are a result of investment banks being forced to adapt to a new balance sheet and regulatory capital regime.
“There’s an assumption in some quarters that the underlying beneficial owner clients will come on a journey with them. However, that assumption is not valid for all clients.
“Take CCPs for example, that’s a fundamental change compared with the current OTC or bilateral modus operandi. In order to really persuade a significant part of the market to participate in CCP transactions, a certain level of engagement, scale, expertise and will is required on behalf of the client before they will look at that alternative. At the end of day, the lending models of the future will come down to economic incentives.”