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Beneficial owners reveal sec lending trends

20 May 2016


Beneficial owners and agents discuss market trends at Global Investor/ISF roundtable in London

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


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.


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