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Beneficial owners reconsider sec lending
10 May 2016
Agents and beneficial owners discuss how to maximise value of securities lending programmes
- Alastair O’Dell, editor, Global
- Naomi Heatley, DC product manager USS Investment
- Matthew Chessum, investment dealer, Aberdeen
- Fuad Ahmed, investment management executive,
- 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
Do beneficial owners look at
particular equity and ask: 'It’s trading 65bps and
I’m getting 45bps in my programme,
Chessum: I would.
Aberdeen funds invest in relatively few positions, but in
bigger sizes. I need to ensure that when we are one of the
biggest holders of a special – especially in emerging
markets – our agent lenders are performing.
Heatley: We are similar,
a very big pension fund with concentrated holdings. Our
approach is linked to our philosophy of responsible investment
– the value of lending revenue versus corporate
engagement. Our managers are often concerned about the lending
– not necessarily in particular markets but for
certain stocks. It must be worthwhile.
Ahmed: For us
it’s the opposite, as we have a much smaller
programme. It would be hard to justify the cost of detailed
analysis. It’s about qualitative understanding of
what’s driving revenue, without necessarily
quantitatively analysing it out. How does it compare to other
periods? What are the main drivers?
Arnesen: If you had that
conversation with your provider and its response was
'it’s staying at 45bps because this £300m of
semi-GC is keeping that balance on’, would you
accept that? The typical response is that it is linked to
another transaction. We look at the ratio of specials to GC.
Every borrower will tell you that if you squeeze everything out
of it then you are going to have less activity. Do you just
want activity on something that is very special?
Chessum: All that GC that
earns me £20 a day, compared to the one special where
I’m earning hundreds of pounds of day? If I
suddenly saw huge amounts of very low-value activity being lent
I’d say 'bring it all back’.
Currently, our lending book is mostly about emerging market
names or smaller midcap stocks.
Kiely: Gone are the days
when a client would complain to a relationship manager and say
'why isn’t my utilisation higher?’
Everyone understands it’s not necessarily the
route to higher returns.
Allen: Our tools are
designed to help beneficial owners better understand the market
conditions, identify trade opportunities and assess the impact
of their risk profile on returns. Beneficial owners can assess
performance at a portfolio or security level, not only against
the market as a whole, but also by reviewing their performance
relative to a peer group of similar beneficial owners. Another
challenge for beneficial owners is accounting for restrictions
and the revenue forfeited as a result of those restrictions.
That’s another area where a performance
measurement tool is valuable.
Chessum: That is the true
value of data. If a stock were to fall 15% some portfolio
managers say it must be due to shorting and want to recall it.
But if the agent lender helps me show we are just a small
percentage of the on-loan value, I can show that it would make
no difference. It gives me ammunition –
they’re more receptive if I go back with