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Regulation to affect asset owners

17 May 2016


Beneficial owners discuss indemnification

PARTICIPANTS: 

  • 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


Regulation around indemnification will directly affect beneficial owners. Is 2016 the year it starts to bite?

Kiely: I saw in Global Investor/ISF recently that Xavier Bouthors of ING Asset Management is looking at having some of the programme indemnified and some of it not indemnified. He believes that it’s inevitable and he’s embracing it. It’s the first time I’ve seen a beneficial owner put that in print.

Arnesen: Splitting indemnification is a reality for US custodians. Not everybody will face increased costs – it will depend on whether you use the advanced or standard methodology. Foreign banks in the US [including BNP Paribas] are outside of this, for the time being. As an industry, we gave away indemnification during the pricing frenzy of the 2000s and it is very hard to ask for it back. The hardest thing about valuing indemnification is that it has almost never been used – even during the Lehman default.

Chessum: I love these conversations. For years, I’ve been told that not only will it save my skin but that it aligned my interests with that of the agent lenders. Now, I’m being told that I don’t need it and I shouldn’t have it. I’m slightly confused! Agents underestimate of how powerful it is for us to sell securities lending internally to sceptical fund managers and the risk department, which see lending as optional. It would take a long time to convince everybody that we don’t need it, since it was one of the programme’s biggest selling points in the first place.

Ahmed: I completely agree. The board would not be comfortable signing off without it. Kiely: It is very hard to reprice – but I’ll play devil’s advocate. I foresee the day when you ask your agent lender why you are getting lower levels of utilisation and they reply that it is because your whole programme is indemnified. Certain trades, for example GC, dependent on fee split, can theoretically no longer be as economically viable as in the pre- Basel III environment. If it’s on a fee split basis, interests are always aligned – the more the beneficial owner earns the more the agent lender earns. There has to be a realisation that if the cost of capital is too high, the agent lenders cannot provide the service.

Heatley: Matt’s [Chessum’s] point around the alignment of interest is the key one here. You don’t necessarily want your lending agent to be incentivised to earn more money if they’re not indemnifying.

They’re your assets. It’s exactly the wrong sort of behaviour to incentivise. Asset managers look at securities lending primarily from the risk perspective, then whether the revenue justifies that risk. Lending doesn’t make enough to justify itself if risk is increased. You’ve got to concentrate on your primary aim – revenue is secondary.


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