Securities lending agents have a healthy pipeline of new business to target in the US heading into 2018, according to one expert.
Peter Bassler, managing director, global head of business development at eSecLending, reckons there are significant public and private mandates up for grabs.
“The number of request for proposals (RFPs) in the US is as robust as I’ve seen it for a long time,” Bassler told Global Investor.
The executive, who joined eSec in 2008, says the business on offer ranges from public pension plans to private asset managers.
“We certainly don’t see beneficial owners taking a step back,” he added. “In fact, we see more lenders reevaluating stock loan and returning to the market.”
US equities remain the single largest revenue generator for the securities lending industry globally on an asset class basis.
However, historically low levels of stock market volatility weakened the average return to lendable value for domestic stocks last year.
That said, 2017 was not far behind 2016 when, worldwide, lenders and their agents combined generated over $8 billion of revenue.
“Many thought the Trump administration was going to bring a lot of volatility to the US stock market in 2017 and that’s not been true,” Bassler explained.
“In fact, the stock market has been on fire and volatility has been extremely low. This has challenged US equity borrowing demand.”
The ongoing disappearance of dividend-arbitrage trades, also known as ‘yield enhancement’, has also weakened revenue for lending desks in certain markets, particularly Europe.
Despite the challenges, Bassler says fixed income lending and new market opportunities are compensating.
“Portfolios lending US treasuries have done well,” Bassler added. “Other asset classes, such as high yield and small caps are still bright spots.
“Better returns are also available in newer markets, particularly Malaysia and Taiwan, providing firms can manage the legal and operational complexities.”
As well as the revenues on offer, Bassler suggests beneficial owners are starting to think about their securities finance activity in different ways.
“Asset owners are using collateral for other things, not just reinvestment. Some, for example, have used collateral to finance real estate activity or to manage short term liquidity needs.”
Others, including a public pension fund, are considering repo transactions for their leverage with other peers.
“It’s early days but we’re working on creating groups with common interests in peer-to-peer lending,” Bassler added. “It’s certainly a focus area for us in 2018.”
Term-trades - loaning out specific securities or baskets for set periods of time – have also remained popular and profitable for lenders, according to the executive.
This has been primarily due to rules forcing banks to hold sufficient amounts of high quality liquid assets on their books for specific periods of time.
Looking ahead, Bassler says lenders need to constantly reevaluate and evolve what they are doing, particularly with respect to cash and non-cash collateral guidelines, in order to meet borrower demand.
For eSec, leveraging partnerships will be a big focus from a business development perspective this year.
“We’re working with a number of large banks which don’t have an existing securities lending capability. We’re also partnering with fund administration firms who have clients interested in securities lending.
“Our objective in this area is to bring our product and expertise to businesses with existing relationships and distribution channels.”