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Sec lending experts discuss last year's top trades

31 January 2017

Equity specials and collateral transformation trades proved popular in 2016

Read more: securities lending

Global Investor/ISF invited securities lending professionals to an event in Boston recently to reflect on the past twelve months and what's in store for 2017. The first part of the discussion focused on the most profitable trades, assets and markets for US asset owners in 2016. Here's what they said:

Bill Smith managing director, Americas sales executive, JP Morgan: US beneficial owners have seen significant success around equity specials. Volatility has produced both deal-related and directional specials. That’s been somewhat offset by reduced performance from high-quality fixed income portfolios – the impact of reduced broker-dealer balance sheet capacity has dampened demand for many of these securities.

Jim McDonald,  senior managing director, global head of trading, agency lending, State Street: Our clients had a very strong first half of the year lending equities. That trend began to fade toward the end of the second quarter as the market collectively began to reduce risk, resulting in a narrowing of spreads for many of the more popular single-name positions. The lack of balance sheet availability in the market has definitely squeezed fixed income to a certain degree. Even so, there were opportunities for clients in collateral transformation trades and in cash reinvestment space as US money market reform produced attractive yields for clients that were investing in prime-like assets.

Nancy Allen global product owner, DataLend: On a global basis, lender to broker revenue totalled $9.15bn in 2016, roughly 6.3% higher year-on-year. The uptick in revenue globally can be attributed to some very hot securities, including a number of equity specials. Revenue from consumer discretionary stocks was approximately $1.4bn. Tesla alone accounted for $353m, roughly 3.8% of global revenue. The second highest earner was Celltrion, which earned $148m.

Pat Morrissey, head of trading, securities lending, The Vanguard Group: Vanguard only lends equities, more specifically, specials. We consistently see the top 10% of our securities on loan generate around 80-90% of total revenue. The voluntary corporate action specials space was interesting for us – throughout 2016 we saw opportunities arise more frequently than in previous years.

Josh Gray, associate director, securities lending and proxy governance, Russell Investments: Similarly, Russell Investments only lends equities and is intrinsic-value focused. Earnings in our US securities lending programmes in 2016 came from directional demand in the consumer discretionary and retail sectors, as well as securities tied to energy/oil and the Chinese economy. Spreads weren’t as wide in 2016, particularly in the second half of the year. We have also seen a contraction with our dividend-paying securities tied to the European markets, as borrowers are experiencing balance sheet constraints due to Basel III. In Germany, the German Federal Fiscal Ministry holding period around the record date has completely taken the trade off the table.

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