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Beneficial Owners
Guide 2022
Flexibility. Reliability. Durability.
There’s No Substitute for Certainty. certainty-bnymellon.com
BENEFICIAL OWNERS GUIDE 2022
Contents 4
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Beneficial Owners Survey 2022 The results of the annual survey examining beneficial owners’ perspectives on the performance of their custodial and third-party agent lenders. The results are broken down by service areas, region, and function. European Beneficial Owners Roundtable Key executives from across the European securities lending space take stock of recent developments and discuss some of the key issues influencing the European securities lending landscape. US Beneficial Owners Roundtable Executives from the lender, borrower, agent lender, consultant, and data provider community discuss some of the key issues influencing the US securities lending landscape. Thought Leadership: the view from Canada Kyle Kolasingh, Director, Securities Finance at RBC Investor & Treasury Services.
10 | European Beneficial Owners Roundtable
EDITORIAL Managing editor Luke Jeffs Tel: +44 (0) 20 7779 8728 luke.jeffs@globalinvestorgroup.com Derivatives editor Radi Khasawneh Tel: +44 (0) 20 7779 7210 radi.khasawneh@euromoneyplc.com Senior reporter, Custody Perle Battistella, Tel: +44 (0) 207 779 8028 perle.battistella@globalinvestorgroup.com Senior reporter, Securities Finance Ramla Soni Tel +44 (0) 20 7779 7246 ramla.soni@euromoneyplc.com Design and production Antony Parselle aparselledesign@me.com BUSINESS DEVELOPMENT Business development executive Jamie McKay Tel: +44 (0) 207 779 8248 jamie.mckay@globalinvestorgroup.com Sales manager Federico Mancini federico.mancini@euromoneyplc.com Head of sales, News & Insight Sunil Sharma Tel: +44 (0)20 7779 8556 sunil.sharma@totalderivatives.com Divisional director Jeff Davis Chairman Leslie Van de Walle Chief executive Andrew Rashbass Directors Jan Babiak, Colin Day, Imogen Joss, Wendy Pallot, Tim Pennington, Lorna Tilbian © Euromoney Institutional Investor PLC London 2022 SUBSCRIPTIONS UK hotline (UK/ROW) Tel: +44 (0)20 7779 8999 US hotline (Americas) Tel: +1 212 224 3570 hotline@globalinvestorgroup.com
24 | US Beneficial Owners Roundtable
RENEWALS Tel: +44 (0)20 7779 8938 renewals@globalinvestorgroup.com CUSTOMER SERVICES Tel: +44 (0)20 7779 8610 customerservices@globalinvestorgroup.com GLOBAL INVESTOR 8 Bouverie Street, London, EC4Y 8AX, UK globalinvestorgroup.com Next publication 2023 Global Investor (USPS No 001-182) is a full service business website and e-news facility with supplementary printed magazines, published by Euromoney Institutional Investor PLC. ISSN 0951-3604
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BENEFICIAL OWNERS SURVEY 2022
J.P.Morgan wins global recognition G
noted: “Our assigned client service team is top notch; outstanding.” A score of 6.65 in EMEA means the US lender was joint first alongside Deutsche Agency Lending. In the unweighted category, J.P. Morgan had the highest unweighted scores in EMEA (6.85) and APAC (7.00), the latter flat since 2020. It continued boosting its score in the Americas, to 6.65 (2021: 6.46) though took the second spot in the region behind Goldman Sachs Agency Lending. Overall, an average score of 6.83 meant the bank continued its upward trend (2021: 6.8 and 2020: 6.69), also slightly behind Goldman Sachs Agency Lending. On a global total basis, it came out first (20.5), as it did in 2021. As a custodial lender, J.P. Morgan was one of only two firms to qualify, and secured the top spots on both an unweighted (20.67 as a global total) and weighted (19.82) basis. It achieved the highest scores in EMEA, Americas and Asia Pacific. It scored top marks with respondents in all the service categories in the weighted category. In the unweighted part of the survey, it was recognised for its Market Coverage in both emerging and developed markets, its Programme Customisation, the Provision of Market and Regulatory Updates, and its Lending Programme Parameter Management. J.P. Morgan also received recognition as top agent lender in the Americas, in the weighted category, which also enabled it to get the best average score. It received first place in the weighted agent lender service categories, gaining recognition for Collateral Management, Engagement on Corporate Actions, Provision of Market and Regulatory Updates, and Settlement and Responsiveness.
lobal Investor/ISF’s Beneficial Owners Survey returned for its 2022 edition to recognise yet again the leading custodial lenders and third-party agent lenders globally. The survey asked beneficial owners from around the world to rate the performance of their agent lenders across areas such as collateral management, market coverage, reporting transparency and programme customisation. This year five firms qualified in the lender categories. J.P. Morgan returned again this year to win the global weighted category, winning the top prize in all three regions. Deutsche Agency Lending also made an appearance in the EMEA unweighted rankings. Goldman Sachs was recognised as top in the Americas unweighted class, with a score that placed it in first place when it comes to the global average rating.
J.P. Morgan recognised globally The US investment bank took the top prize again this year in the weighted category, scoring the highest global totals in Asia Pacific (APAC), Americas and Europe, the Middle East and Africa (EMEA). Its global average rating across the three regions, at 6.72, was slightly down on last year’s (6.76) but up from the 6.50 seen in 2020. The bank scored 6.42 in the Asia Pacific weighted list – an improvement on 2021’s 6.41 - making it the top-rated lender in that region as well as the only lender to qualify there. A score of 7.1 meant the lender also came out top in Americas, an improvement on last year’s second spot (with a rating of 6.76). A survey respondent based in the region RESPONDENTS: This year’s survey gathered 61 responses across a number of asset-holding firms. Just over half (54%) of these were asset managers or mutual funds, which is down on last year’s representation (66%). Respondents also comprised public (18%) and private (5%) pension funds, insurance companies (11%) and central banks (7%). Half the firms (30) that responded reported assets under management (AuM) valued at more than $100bn, while onethird had assets between $10bn and $25bn. The remainder had AuM under $10bn. Most respondents (41) revealed they use only one single provider. Ten used two providers, and the remainder worked with three or more.
Beneficial Owners Guide 2022
Like 2021 results, respondents showed a differing appetite for lending. The same number of firms (10) said they had made available more than $100bn and between $50bn$100bn of their assets. Some 22 firms lent between $10bn and $50bn. Nineteen firms had less than $10bn of their assets out on loan. When it comes to the value of the assets on loan, just over one-third (21) of firms lent out less than $1bn at any point in time. At the higher end of the scale, no firms lent over $100bn while only two had between $80bn and $90bn out at one time. Some 28 firms had between $1bn and $10bn on loan typically out on loan at any given point in time. The remainder were divided between $10bn and $80bn on loan.
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BENEFICIAL OWNERS SURVEY 2022
was higher than last year’s (5.74) though the lender was third out of its peer group in this region. On a global total level, its score of 12.19 was slightly down on last year’s (12.29) – the bank maintained its second place again this year. It was recognised as top agent lender in the unweighted category, across EMEA, APAC and the Americas, securing a top global score of 13.68. It was one of three firms, alongside eSecLending and Deustche Agency Lending, to qualify in all regions. It posted equally as good results in the agent lender service categories, securing wins in most areas including Collateral Management, Income Generated, and Market Coverage (Emerging Markets and Developed Markets). In the weighted space, it came first in EMEA and globally, but conceded the first spot to J.P. Morgan in the Americas.
Goldman Sachs Agency Lending: notable improvements The US firm improved its performance in 2022, coming out top in the Americas with a score of 6.89 in the unweighted category and top in terms of the global average (6.84). In comparison, it was in third place in 2021. It came second in EMEA (6.79), behind J.P Morgan. Overall, Goldman Sachs Agency Lending’s global total of 13.68 in the unweighted section was an improvement on 2021, and put it in second place. It scooped up the top prize in several unweighted individual service categories, including Collateral Management, Engagement on Corporate Actions, Income Generated and Risk Management. A survey respondent from the Americas noted they had received “excellent client service [from Goldman Sachs Agency Lending]”. In the weighted section, Goldman Sachs Agency Lending had the second highest global average of 6.10, which was down on 2021 but a significant improvement on 2020’s 5.87. It secured a score of 6.31 in the Americas weighted list, which was down on last year’s 6.55. Its 2022 rating of 6.88 in EMEA
Deutsche Agency Lending: continued strong performance in EMEA The European lender qualified in both the Americas and EMEA regions, and maintained its top rating in EMEA in the weighted category, with a score of 6.65 (2021: 6.72), though
ALL LENDERS (UNWEIGHTED) COMPANY
GLOBAL TOTAL
AVERAGE
Deutsche Agency Lending
EMEA 6.37
AMERICAS
6.47
ASIA PACIFIC
12.84
6.42
eSecLending
6.35
6.42
12.77
6.39
Goldman Sachs Agency Lending
6.79
6.89 13.68
6.84
JPMorgan
6.85
6.65
7.00
20.50
6.83
RBC Investor & Treasury Services
6.20
6.44
12.64
6.32
ALL LENDERS SERVICE CATEGORIES (UNWEIGHTED) COMPANY
COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT Deutsche Agency Lending
6.55
6.36
6.40
eSecLending
6.09 6.25
6.50
Goldman Sachs Agency Lending
6.91
6.92
6.82
6.83
JPMorgan
6.80
6.80
6.73
6.87
RBC Investor & Treasury Services
6.27
6.00
6.25
6.27
MARKET COVERAGE DM
MARKET COVERAGE EM
PROGRAMME CUSTOMISATION
PROVISION OF MARKET & REGULATORY UPDATES
COMPANY
Deutsche Agency Lending
6.30
6.55
6.27
eSecLending
6.30
6.42
6.55
6.30
Goldman Sachs Agency Lending
6.83
6.75
6.91
6.67
JPMorgan
6.87
6.77
6.93
6.87
RBC Investor & Treasury Services
6.25
6.30
6.45
6.27
COMPANY
RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS Deutsche Agency Lending
6.73
6.45
6.27
eSecLending
6.75
6.42
6.33
6.25
Goldman Sachs Agency Lending
6.83
6.83
6.92
6.83
JPMorgan
7.00
6.67
6.80
6.67
RBC Investor & Treasury Services
6.92
6.33
6.42
6.42
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BENEFICIAL OWNERS SURVEY 2022
had to share the spot with J.P. Morgan this year. It was ranked fourth in terms of weighted global average (5.88) and global total (11.75). It made an appearance in the unweighted rankings this year in the Americas, and was third globally by unweighted global averages with a score of 6.42, reflecting a global total of 12.84. It was in the top three in EMEA (6.37) and Americas (6.47). The lender scored favourably in the weighted Service Categories, coming out in the top three in most of them including for Income Generated, and Relationship and Risk Management. “Deutsche Agency Lending has been a great agent lender for us [over the past few years],” said one respondent. “Specifically over this past year, we have been happy with the increased earnings, client service, and program parameter management. Deutsche Agency Lending has really done a great job for us over the years including this past year and always goes above and beyond with client service.” The European bank also received nods on the agent lender side, and was awarded top place in EMEA in the weighted category, and second place in the unweighted category. It also finished in second place in terms of global totals.
eSecLending: top 3 results The lending firm qualified in both EMEA and Americas, and was in the top three global totals in the weighted category (12.06), slightly down on 2021 (12.09) but up on 2020’s total of 11.66. It had the third highest average total in this category (6.03), a level consistent with what was seen in 2021. eSeclending scored 6.42 in the Americas unweighted category, down on last year’s level but up significantly from 6.02 in 2020. On a global total basis, it scored 12.77 The firm, which a respondent said provided “excellent customer service,” was also recognised for its performance in unweighted Collateral Management, Lending Programme Parameter Management, and Provision of Market and Regulatory Updates (third in all categories), and Market Coverage in Emerging and Developed Markets (joint third in both). In the weighted category, it had additional nods for Relationship Management (second) and Income Generated (third). The firm had the second highest global total of 12.06 (behind J.P. Morgan) in the Third-Party Agent Lenders weighted category based on scores in EMEA and the Americas.
ALL LENDERS (WEIGHTED) COMPANY
EMEA
AMERICAS
ASIA PACIFIC
GLOBAL TOTAL
AVERAGE
Deutsche Agency Lending
6.65
5.10
11.75
5.88
eSecLending
5.77
6.29
12.06
6.03
Goldman Sachs Agency Lending
5.88
6.31
12.19
6.10
JPMorgan
6.65
7.10
20.17
6.72
RBC Investor & Treasury Services
4.39
6.04
10.43
5.22
6.42
ALL LENDERS SERVICE CATEGORIES (WEIGHTED) COMPANY
COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT Deutsche Agency Lending
6.16
8.47
5.25
eSecLending
6.20 8.95
5.65
Goldman Sachs Agency Lending
6.72
4.11
9.38
5.73
JPMorgan
7.34
4.48
10.23
6.35
RBC Investor & Treasury Services
5.59
3.34
7.93
4.81
MARKET COVERAGE DM
MARKET COVERAGE EM
PROGRAMME CUSTOMISATION
PROVISION OF MARKET & REGULATORY UPDATES
COMPANY
Deutsche Agency Lending
3.82
5.09
3.31
eSecLending
4.03
5.41
3.76 3.70
2.41
Goldman Sachs Agency Lending
4.21
2.57
5.60
JPMorgan
4.65
2.74
6.20
4.21
RBC Investor & Treasury Services
3.54
2.25
4.79
3.20
COMPANY
RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS Deutsche Agency Lending
6.63
6.10
8.68
7.15
7.11
6.44
9.36
7.53
Goldman Sachs Agency Lending
6.99
6.66
9.81
7.92
JPMorgan
7.94
7.19
10.69
8.50
RBC Investor & Treasury Services
6.55
5.73
8.42
6.92
eSecLending
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BENEFICIAL OWNERS SURVEY 2022
5.02 last year’s 5.17, and a global total of 10.43, also up on previous year figures. The lender scored 6.04 in the weighted Americas section, up for the second year running (2021: 5.77). RBC Investor & Treasury Services was one of only two lenders to qualify in the Custodial Lender categories, alongside J.P. Morgan. Respondents viewed Relationship Management and Risk Management as two two of the bank’s key strengths in the unweighted Service Categories.
RBC Investor & Treasury Services: continued momentum RBC Investor & Treasury Services scored a global unweighted average of 6.32, which is slightly down on last year’s 6.34. The Canadian’s bank global unweighted total was was 12.64, down on 2021’s figure but on par with results seen in 2020. The lender had an unweighted score in EMEA of 6.20, which was up on last year’s figure of 6.17 though its figure in the Americas (6.44) was a slight drop. In the weighted section, RBC Investor & Treasury Services had a global average of 5.22, up on last year’s CUSTODIAL LENDERS (UNWEIGHTED) COMPANY
EMEA
AMERICAS
ASIA PACIFIC
GLOBAL TOTAL
AVERAGE
JPMorgan
6.85
6.82
7.00
20.67
6.89
RBC Investor & Treasury Services
6.10
6.44
12.54
6.27
CUSTODIAL LENDERS SERVICE CATEGORIES (UNWEIGHTED) COMPANY
COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT JPMorgan
6.85
6.92
6.77
6.92
RBC Investor & Treasury Services
6.20
5.90
6.18
6.20
COMPANY
MARKET COVERAGE DM
MARKET COVERAGE EM
PROGRAMME CUSTOMISATION
PROVISION OF MARKET & REGULATORY UPDATES
JPMorgan
6.92
6.46
7.00
6.92
RBC Investor & Treasury Services
6.27
6.33
6.50
6.30
COMPANY
RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS JPMorgan
7.00
6.69
6.85
6.85
RBC Investor & Treasury Services
6.91
6.36
6.36
6.36
CUSTODIAL LENDERS (WEIGHTED) COMPANY
EMEA
AMERICAS
ASIA PACIFIC
GLOBAL TOTAL
JPMorgan
6.65
6.75
6.42
19.82
AVERAGE 6.61
RBC Investor & Treasury Services
4.41
6.04
10.45
5.23
CUSTODIAL LENDERS SERVICE CATEGORIES (WEIGHTED) COMPANY
COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT JPMorgan
7.17
4.43
9.97
6.21
RBC Investor & Treasury Services
5.66
3.38
8.02
4.87
COMPANY
MARKET COVERAGE DM
MARKET COVERAGE EM
PROGRAMME CUSTOMISATION
PROVISION OF MARKET & REGULATORY UPDATES
JPMorgan
4.55
2.58
6.08
4.12
RBC Investor & Treasury Services
3.63
2.31
4.92
3.28
COMPANY
RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS JPMorgan
7.69
6.99
10.43
8.50
RBC Investor & Treasury Services
6.68
5.87
8.53
7.02
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BENEFICIAL OWNERS SURVEY 2022 AGENT LENDERS (UNWEIGHTED) COMPANY
EMEA
AMERICAS
GLOBAL TOTAL
AVERAGE
Deutsche Agency Lending
6.37
6.47
12.84
6.42
eSecLending
6.35
6.42
12.77
6.39
Goldman Sachs Agency Lending
6.79
6.89
13.68
6.84
JPMorgan 6.48 6.48
AGENT LENDERS (WEIGHTED) COMPANY
EMEA
AMERICAS
GLOBAL TOTAL
Deutsche Agency Lending
6.65
5.10
11.75
AVERAGE 5.88
eSecLending
5.77
6.29
12.06
6.03
Goldman Sachs Agency Lending
5.88
6.31
12.19
6.10
JPMorgan 7.45 7.45
AGENT LENDERS SERVICE CATEGORIES (UNWEIGHTED) COMPANY
COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT Deutsche Agency Lending
6.55
6.33
6.36
6.40
eSecLending
6.09
6.33
6.25
6.50
Goldman Sachs Agency Lending
6.91
6.92
6.82
6.83
JPMorgan
6.50
6.50
6.25
6.75
COMPANY
MARKET COVERAGE DM
MARKET COVERAGE EM
PROGRAMME CUSTOMISATION
PROVISION OF MARKET & REGULATORY UPDATES
Deutsche Agency Lending
6.30
6.00
6.55
6.27
eSecLending
6.30
6.30
6.42
6.55
Goldman Sachs Agency Lending
6.83
6.75
6.91
6.67
JPMorgan
6.50 6.75
6.50
COMPANY
RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS Deutsche Agency Lending
6.73
6.45
6.27
eSecLending
6.75
6.42
6.33
6.36 6.25
Goldman Sachs Agency Lending
6.83
6.83
6.92
6.83
JPMorgan
7.00
6.50
6.50
6.00
AGENT LENDERS SERVICE CATEGORIES (WEIGHTED) COMPANY
COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT Deutsche Agency Lending
6.16
3.62
8.47
5.25
eSecLending
6.20
4.09
8.95
5.65
Goldman Sachs Agency Lending
6.72
4.11
9.38
5.73
JPMorgan
7.93
4.83
10.72
7.10
COMPANY
MARKET COVERAGE DM
MARKET COVERAGE EM
PROGRAMME CUSTOMISATION
PROVISION OF MARKET & REGULATORY UPDATES
Deutsche Agency Lending
3.82
2.20
5.09
3.31
eSecLending
4.03
2.41
5.41
3.76
Goldman Sachs Agency Lending
4.21
2.57
5.60
3.70
JPMorgan
4.99 6.85
4.52
COMPANY
RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS Deutsche Agency Lending
6.63
6.10
8.68
7.15
7.11
6.44
9.36
7.53
Goldman Sachs Agency Lending
6.99
6.66
9.81
7.92
JPMorgan
9.00
7.93
11.57
8.66
eSecLending
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BENEFICIAL OWNERS SURVEY 2022
Global Investor/ISF Beneficial Owners Survey 2022 METHODOLOGY: number of responses to qualify in each: six in the Americas, five responses in Europe, Middle East and Africa (Emea) and four in Asia Pacific. To qualify globally, a lender must qualify in at least two regions. Custodial and third-party agent lender tables Ratings of lenders acting in a custodial or third-party agent lender capacity are recorded in separate tables. The respondent is asked to define their relationship with the lender: custodial, agent or both. If the relationship involves both forms of arrangement, the response counts for both the custodial and agent lender tables. Therefore, some responses will be included in both the custodial and third-party agent lender tables. All the scores calculated for overall lenders will be replicated for custodial and third-party agent lenders separately. The qualification criteria are lower for the custodial and agent lender tables compared with overall. To qualify for either the overall custodial and third-party agent lender tables, lenders need four responses in the Americas, four in Emea and three in Asia Pacific.
Beneficial owners are asked to rate the performance of their agent lenders. Respondents are asked to rate their agent lenders across 12 service categories (see below) from one (unacceptable) to seven (excellent). There are two methodologies: unweighted and weighted. Unweighted methodology All valid responses for each agent lender are averaged to populate unweighted tables. All beneficial owners’ responses are given an equal weight, regardless of the size of their lendable portfolio. All categories are given equal weight regardless of how important they are considered to be by respondents. No allowances are made for regional variations. Weighted methodology The weighted table methodology makes allowances for both the size of the respondent’s lendable portfolio and how important the respondents, on average, consider each category to be. An allowance is also made for differences between average scores in each region to make meaningful global averages.
Most improved The agent lender that improved its score by the greatest margin over its equivalent 2021 score is the most improved firm. Agent lenders are ineligible if they did not qualify for the 2021 survey.
Step one – weighting for lendable portfolio: A weighting is generated to reflect to the size of the respondent’s lendable portfolio. Each respondent is put into a quartile depending on its total lendable portfolio. The scores of the respondent are then given a weighting based on this quartile. As the boundaries of each quartile are determined by all the responses received in this year’s survey, the boundaries are unknown until the survey closes. For the purposes of the 2022 survey all Asian responses will be given a weighting of 1. Asian responses will not be included in determining the quartile boundaries. However all Asian responses will be subject to step two – see step 2 below. Criteria AuM in lowest quartile AuM in middle two quartiles AuM in the top quartile
Service categories Respondents are asked to rate each of their providers from one to seven across 12 service categories. The ratings of respondents for each service category are averaged to produce the final score for each provider. The service categories are: • Income generated versus expectation • Risk management • Reporting and transparency • Settlement and responsiveness to recalls • Engagement on corporate action opportunities • Collateral management • Relationship management/client service • Market coverage (developed markets) • Market coverage (emerging markets) • Programme customisation • Lending programme parameter management • Provision of market and regulatory updates To qualify for each service category table, the lender needs the same number of responses to qualify for the corresponding main table; i.e., to qualify for an overall, custodian or agent lender service category the lender must qualify in two of the three regions (for example, five responses for that category in the Americas and four in Emea). A lender can qualify in some categories and not others – it does not have to qualify globally for all service categories to be any particular service category.
Weighting 0.7 1 1.3
Step two – weighting for importance: An additional allowance is made for how important beneficial owners consider each category to be. This is done to acknowledge the fact that beneficial owners consider some categories to be more important than others. Respondents are asked to rank each service category in order of how important the function is to them. An average ranking is then calculated for each of the twelve categories (11= highest ranking, 0 = lowest). This number is then divided by 5.5 to give a weighting within a theoretical band between 0 and 2, with an average of one. Again, basing weights around one is done to preserve comparability with unweighted scores. To illustrate, if every respondent considers category X to be the most important it would get an average rank of 11. This is then divided by 5.5 to provide the weighting for category X, i.e. 11 / 5.5 = 2.
VALID RESPONSES For a response to count for the purposes of qualification, the beneficial owner must rate the lender in no fewer than eight of the 12 service categories (i.e. it can tick n/a in no more than four service categories). It is possible for a lender to qualify globally or regionally without qualifying for all service category tables, if it receives n/a responses for certain categories. For example, it may not offer emerging market coverage and therefore receive a string of n/a ratings in that category but qualify for all other categories, regionally and globally. If a lender receives two or more responses in the same region from the same beneficial owner, an average of the ratings will be taken and it is considered to be one response for qualification purposes. If a lender receives two or more responses from the same client in different regions (e.g. pension scheme X rates lender Y in Emea and the Americas) the responses are not averaged and are counted as separate responses for qualification purposes.
TABLES AND SCORES Overall tables The overall table contains all responses for a lender regardless of its relationship with the beneficial owner, whether custodial or agent. The following scores are calculated: separately for each region, a global total, a global average and for each service category. Regional scores are the average of all responses from beneficial owners based in that region (it is the location of the beneficial owner, not the lender, that is the relevant). There are three regions. A lender must receive a different minimum
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ISLA 29th Annual Securities Finance & Collateral Management Conference 6 - 8 JUNE 2022 | VIENNA MARRIOTT HOTEL
For all conference information: events@islaemea.org | www.islaemea.org
EUROPEAN BENEFICIAL OWNERS ROUNDTABLE 2022
European Beneficial Owner Roundtable 2022 Global Investor/ISF met with some of the key participants in the European securities financing space on February 9 at a venue in central London to discuss some of the key themes and trends which have dominated these markets. The following pages feature written highlights of the discussion, which centered on five main topics: setting the scene, regulation, technology, ESG and final thoughts. A video of each discussion can be viewed at the end of each section.
PARTICIPANTS Chair: Amélie Labbé, Managing director, News & Insight, Global Investor Group
Ernst Dolce, Head of Liquidity Solutions, AXA IM
Martin Aasly, Senior Portfolio Manager, NNIP
Matthew Chessum, Investment Director - Securities Lending, Collateral Management, Money Markets, Abrdn
Nick Davis, Executive Director, EMEA Head of Relationship Management, J.P. Morgan Agency Securities Finance
Sunil Daswani, Global Head Of Agency Securities Lending, Standard Chartered
Andrew Geggus, Global Head of Agency Securities Lending, BNP Paribas
Andrew Dyson, CEO, International Securities Lending Association
Zorawar Singh, Global Head, Agency Securities Lending, Deutsche Bank
Stephen Kiely, International Head of Sec Fin Sales and Relationship Management, BNY Mellon
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1. Setting the EU scene Stephen Kiely, BNY Mellon: 2022 we see as being a year where there’s going to be some giving and some taking. We’re seeing no real directional shorts in the market right now, and it’s benign from that perspective. That’s on the equity side. On the fixed income side, the rate hikes are going to help in the US and in the UK. German bunds are still strong - they’re always there or around that level. But with some things, we’re still not back to a sense of normal. I think scrip levels are still down, most people are still seeing that and that hasn’t come back from its pre-COVID levels. We’re expecting dividend distributions to be up more this year, now that those bans have firmly gone away, and things should be looking up a little bit. If there’s any light coming, it will be in M&A and general corporate action activity. If we were sat here this time last year, we probably wouldn’t have been talking about Naspers and Vivendi, which turned out to be the two biggest specials in Europe last year, so I wouldn’t be surprised if there wasn’t something like that at some point this year.
ances if this change hadn’t happened? From a corporate action perspective, it was again very positive. 2021 saw an increase in SPACs out of the US, IPOs, cap raisings etc. During that period, we also experienced the Meme phenomenon, with hedge funds. This impacted directional specials because of the disclosure rules that were put into place. Although 2021 was a good year, could we have seen more special activity? As already mentioned, there has been a change in fiscal policies, an increase in interest rates, and a shift in asset allocation, moving away from equities and more into fixed income. It will be very interesting in the specials space following the shift in asset class, and in 2022 we may very well see more demand in corporate bonds than equities. Finally, from a volatility perspective, we saw record sales last year, so it’s very much around liquidity management and making sure that the trading desks are focused on this to ensure a timely settlement. We have algorithms in place as I am sure other agents do to manage this process.
Nick Davis, J.P. Morgan: We know that securities lending caters for volatility. As already mentioned, 2021 was a good year for the industry with an increase in balances and flow as the benchmark providers have shown, but at the same time, there has certainly been changes in the marketplace. For example, in the US, hedge funds were rotating out of tech and more into index-based names especially in Europe. From that perspective, when the primes are looking to cover their shorts, you’re looking at internalisation first before going to the agent lenders. Therefore could we have seen more bal-
Sunil Daswani, Standard Chartered: From the perspective of Standard Chartered, our model is slightly different to some of our peers. Therefore, we do sometimes see different opportunities. At this point in time, the opportunity is like what we’ve always said: it’s looking at credit and duration risk. And we’re certainly seeing in the US Treasury market that great opportunity can be achieved from the lending of US treasuries of clients looking to take on lower forms of collateral, equity collateral, and also lending on a term basis. This takes education. It’s something that we are very proud of - what we’ve done as an industry over the last few decades, and coming out of the global financial crisis - to ensure that if you’re asking clients to take on risk, they understand that that risk comes with a reward, but it’s a risk that they’re aware of. The other thing that we see in our model, which is slightly different - and we do look and focus very much on the specials activity, which is where the industry is going – are in particular premiums in auctions of exclusives in the right markets, particularly in emerging markets, or emerging developed markets like Taiwan and Korea. What’s quite interesting when we’ve seen these premiums of recent clients is that they are making a lot more than what they would do if they were in an open discretionary programme. Finally I’m hoping at this roundtable that we’ll see that the traditional model of securities lending is forever evolving. We’ve talked about this a lot. But we’re actually now trading in this way for certain clients where they wish to raise cash: we lend their securities, we take the cash in, and we actually give it to our clients to manage, which is what they’ve needed, and they’ve asked for a long time.
If there’s any light coming, it will be in M&A and general corporate action activity. Stephen Kiely
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Zorawar Singh, Deutsche Bank: 2020 was a catalyst for me. COVID was a period of volatility. Liquidity was a top priority for a lot of clients and this, in effect, opened some clients’ eyes to what it can be used for – securities lending, but more so in the fixed income space. I don’t think you’d see a lot of equity lenders come out and say: ‘I am taking the cash collateral back’. But to us, it doesn’t matter, right? I mean, we do our day job, we’ve got desks that cover all aspects. So as far as cash is concerned, it’s down to process, and to optimising how you manage that cash.
- lending the assets - but how they can reuse the assets across all their activities to make money or reduce their costs. I would leverage the point about US Treasuries. At the end of last year, mid-last year, there were a lot of opportunities between pair trades like GBP and USD with some good pick-up yield in the market. I think that we will continue to see this type of transition. When it comes to the collateral switch that you mentioned, we made more money in corporate than in equity last year. Corporate bonds have been good in terms of yield. I think that will continue. Opportunities will be more on the corporate side. When it comes to equity, if the volatility continues to be above 20 and up to 25, like we saw at the beginning of the year, there will be opportunity there. For UCITS funds, you can’t go and block those assets. But on the balance sheets of insurance or pension funds they have to deal with a set of regulations that is eating their assets. There is also competition for the same available assets. So if you have a government bond, you need to think: • are you posting it for clearing under a CCP? • are you using it for long box for UMR? • can you make money with it via securities lending? • or use it for funding to source via the repo? So clearly, the conversation that we’re having with clients is: ‘What is the cheapest asset on my balance sheet to use as collateral that has no value? and ‘With the assets that have value, how I can make money?’
Ernst Dolce, AXA IM: On the beneficial owner side, we saw a couple of things. In 2020/21, the discussion with clients shifted from monetising their assets to also removing the liquidity trap that we have seen on their balance sheets. For the collateral, the European market is mainly non-cash collateral which is the opposite of the US (eg Europe: 80% non-cash collateral and 20% cash collateral versus US 20% non-cash collateral and 80% cash collateral). So currently, the focus is more on the cash because there is no pickup in the market negative interest rate environment, and you need to monetise the cash. When increasing the cash under the securities lending format, you can reduce the cost of cash sitting on your balance sheet, as this is expensive and the fund gets charged by the custodian. We have clients looking for a solution where they don’t see securities lending as just one pillar
1. SETTING THE SCENE
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2. Fails, fines and the way forward Andrew Dyson, ISLA: There’s a lot to talk about and also quite a lot of positives that are coming out of the regulatory agenda. And if I think back to the early days of SFTR and CSDR, many of us, including ISLA, fought hard for certain provisions of that regulation not to come in. The other thing about CSDR, more recently, is settlement discipline. So, what SFTR taught us about our market is that it’s a very big, diverse, broad market. But it suffers from lack of clarity and standardisation. SFTR was the catalyst of that discussion. More recently, CSDR, a huge piece of legislation, has been much discussed and highly criticised from many quarters, including ourselves, over these two big things: the mandatory buy-in regime, and more specifically, the settlement fail fine regime. After quite a lot of extensive lobbying and work with all of you and several of our friends and other associations, the mandatory buy-in piece was excluded from the go-live of the fines earlier this month. And if you’re watching on catchup, that was February 2022. However, the buy-in thing hasn’t gone away permanently – just for a bit. I saw something from the European Commission, only this morning before I came down here, which suggests that around about the middle of March, you will see a proposal from them that will include the reincarnation of the mandatory buy-in. There are certain groups who feel that mandatory buy-ins are a good thing, because they engender market discipline. We don’t agree with that view at all because we feel that our market has been quite good at policing itself. The master agreements that many of you know that we sponsor, and cover have this thing called a mini close-out, that effectively allows the same thing. We need to start working on a dataset with empirical evidence that shows the impact this will have on things like market liquidity. You mentioned corporate bonds: we know that if they start getting mandatory bought in, they will disappear from the market, because clients will just pull them all back and leave them in custody accounts. This cannot be in line with the spirit of this piece of legislation.
are around about 10%. If you’re above that you’re not doing as well, if you’re below, you’re doing better. Since we’ve been tracking that number, for 18 months, that’s gone up, which isn’t very encouraging. What CSDR will do is - there will be some bills looking for a home. And the first incarnation of that cycle will be in about six weeks’ time, in mid-March. In the middle of March, you’ll begin to see what that means for you and your clients. And I think that could be quite a sobering moment to understand what those fails look like and the magnitude of the numbers. What I think it also really enforces is we must work on things together, that will effectively not change that behaviour but identify the reasons for the underlying fails. It will be increasingly important to bear in mind that if you have a high level of fails in your business, you’re going to get absolutely hammered by the regulators. We know that the UK regulators are looking at a version of CSDR that’s not going to be as hard as elsewhere. And we know that they’re not keen on doing anything on mandatory buy-ins. However, they all quite like fines. And they will point you to the US Treasury market 10 years ago, they put in huge fines and it miraculously righted itself. The real killer around fines is around recalls and getting them back early enough from your clients to cover the cash sale on the other side. And the other one is many outward legs fail because the collateral doesn’t show up.
Kiely: They tend to be the less liquid parts that we do. Dyson: Yes, and Vodafone’s never failed ever. All the ones that disappear out the door and that you can’t get back will be the ones you make most money on, where you’ve got risk you manage already. These are the ones that will be hit hardest by this regime. On CSDR, the fines element came in at the beginning of the month. And to answer your earlier question, there is no doubt that heavy fines will change behaviour. We live in a world where we estimate that the fails levels in our market
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The real killer around fines is around recalls and getting them back early enough from your clients to cover the cash sale on the other side. Andrew Dyson
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Kiely: On that, I was speaking to my operations department about this last week; we often see borrowers who are returning assets that have not been specifically recalled and the loan hasn’t come back, and you just roll it, roll it, roll it, roll it, as the client hasn’t asked for it back. They’re still getting paid and they’re happy enough, but the borrower is going to get fined for this. Anything that speeds up the efficiency of the market is great, but I do think some institutions are going to need almost an army of individuals to reconcile this process. And that concerns me. Andrew Geggus, BNP Paribas: it’s a little bit of the carrot and stick sometimes. But I would prefer to be investing in figuring out how to create better efficiencies as we don’t like fails in the market. No one does, it doesn’t help anybody. But having to build out a way of dealing with fines coming in and how we implement them, pass them onto clients, where that sits, different account structures as opposed to building out a way of having simultaneous settlement in the future or a network of technology that we can touch on later around settling at the exact same time and removing that risk...
I would prefer to be investing in figuring out how to create better efficiencies as we don’t like fails in the market
Dyson: I think they’re going to be significant. The other thing I would say is that if you’re identified as a firm that is persistently causing fails, you will get a visit from your regulator. Because even if your point is well made about how we should be investing into things that add value to our clients, when you talk to the regulator community, they don’t care about that. They just think that a market that has a high level of fails is unacceptable.
Andrew Geggus
about borrowers taking some of them, but this might not be possible. What happens when someone says: we think it’s yours. And you say no, it’s not. Just as we have all said, it’s all actually trying to achieve the right thing. For me, it’s more about the amount of time spent resolving something that involves us as agent lenders, and our buy-side clients as well.
Daswani: I would like to remind everyone of something quite interesting. I’ve always thought that there’s no mention of this internally, when CSDR comes up. We still consider Taiwan and Korea like new markets - and Malaysia too to some extent – of some significance that we brought into securities lending. Yes. And the main point is that you can have a zero fail in that market. And we deal with it, and we lend securities, we make money and we have zero fails. We call them emerging markets, but we are moving somewhat in that direction. Our industry works very well with lending securities and not having fails. I don’t see CSDR as a threat, I see it as bringing further efficiency for us all.
Matthew Chessum, Abrdn: From my perspective, I completely echo what Sunil says. We already lend and buy in markets; we already lend in markets where there are fines in place. Anything that involves tightening up processes and making operational flows more efficient, I’m all for. As a beneficial owner, there’s nothing more irritating than having failing sales on the back of a securities lending transaction, because a borrower is returning to the wrong SSIs, or something’s been dumped in the wrong account, and it’s takes too long to resolve. Anything that helps focus the mind to get loans back on time, I think is positive. And like I say, we already lend in many markets where there are automatic buy-ins, and where these penalties do already exist, and we transact in them a lot more efficiently than in those markets where they don’t exist. I don’t think that we should be too scared of it. I think the reconciliation is going to be a bit of a nightmare, because from my understanding, a lot of custodians can’t distinguish between a securities lending transaction and a normal buy and sell transaction. I can imagine a lot of chasing, going around the houses to find out where the credit or the debit
Singh: My view is that it’s a little bit more than just… I think 10% is a fact but when you look at CSDR, it goes a bit beyond what the end of day outcome is. It’s what you do intraday as well that’s become more important. You may have STP from a technology standpoint, going front to back, but then you need to start having to cancel some things out afterwards. I think there’s an element of process. But there’s also an element of actually allocating costs as well. When those fines start coming in, where are they going to sit? We talked
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sits at the end of the day. But I think we’re going to have to wait and see, it’s going to be a case of waiting until those credits and debits come in, and then seeing where they can be allocated. I think it comes down to buffer management, and ensuring the SSIs are correct first time around. Martin Aasly, NN IP: I can echo that. We’re quite curious to see how this is going pan out, how frequent this is this going be. But certainly, a lot of processes have had to change. It’s important to have accurate and timely information flows between the lending parties, custodians, lending agents, it’s more important than ever. And our fear going into the CSDR was - and I think this is of systemic importance as well - that we would have to become a lot more cautious about what assets we make available to lend. The logic is that if securities go lower, there will be less liquidity, and the knock-on effect will mean a further reduction in liquidity, which reduces market efficiency. In general, this is just the wrong way to go. And to be fair, I think that’s also where monetary buy-ins would have a really big impact. And we’re glad that’s been put aside. We were hoping indefinitely, but I hear from Andy that’s not going to be the case.
If mandatory buy-ins do come in across the board then that opens up a whole new agenda.
Davis: Sunil mentioned trading in Taiwan and Korea, and the mandatory buy-ins and zero fails attached to those markets. The point that was just mentioned about the industry embracing mandatory buy-ins and getting through it needs to be approached with caution. The kind of volumes that we have in the European markets today compared to Taiwan are very different. If mandatory buy-ins do come in across the board then that opens up a whole new agenda. Are we talking a more aggressive style of buffer management in addition to a strain on liquidity? Definitely one to watch as this regulation continues to evolve.
Nick Davis
to include in the lending programmes. Kiely: We saw that when SFTR kicked in, several self-lenders or smaller agent lenders, just said: I’m out, because I do not have the resource for this. Is it right that it’s almost pushing the activity towards a smaller number of big players? Chessum: You’ve got all this European regulation coming in while UCITS are losing their attractiveness because they’re more tied to this regulation. That makes it more difficult.
Geggus: This could have a knock-on effect as well for the rest of the industry if borrowers are struggling to get something back. It’s not a simple case of, well, they might only be 40% utilised in the market, because if 60% has been held back for buffer management internally, then suddenly that’s an active 100% utilisation.
Kiely: Interestingly, the Bank of England stock lending committee minutes the other day showed that UCITS are going to be lobbied re their restrictions. Because for a long time now, the availability of assets from UCITS funds has been three times the percentage of on-loan assets from UCITS funds.
Kiely: Matt [Chessum] - how significant a barrier to entry do you think that is for certain funds? Do you think there’s a real danger or a percentage that will just say: ‘this is too much hard work; lending is not for me?’
Dyson: We’ve tracked the availability of UCITS funds in programmes versus the proportion of on-loan balances. There’s 45% of all funds in programmes in Europe, or similar structures, yet they represent somewhere between 15 and 20% of on-loan balances. In a like-for-like standardised world, it should be the same. There’s no reason why it shouldn’t be. And primarily the reasons UCITS don’t lend as much as other people is there’s restrictions around collateral and term. We estimate by looking at the SFTR data that up to 90% of
Chessum: Definitely. I think asset pools need now need to be of a certain size to be able to justify the amount of oversight needed to ensure that you’re running an efficient securities lending operation. Reputational risk is massive for the buyer side. But, you don’t want to be in a position where you’re not fully in control of what you’re doing, especially in the new world of ESG, and of some of the assets that you’re looking
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loans in Europe could come from entities that are outside of Europe. My suspicion is that’s a bit high. We did a straw poll three or four years ago, and it came out about 70%. What that means is for all of you lending securities, you’re lending on behalf of a client who falls outside the reporting regime on the loan side of the trade. I was talking to a gentleman who runs a cash equities exchange in the Netherlands. He told me something I was staggered about: 90% of participants are non-European on that cash exchange in Amsterdam. This tells me that, in Europe, there’s a lot to do about raising that awareness of what capital markets do. And the reason it’s 90% is, we’re not in that number anymore. Because think about where most stocks trade: they trade primarily in the London market, because that’s where the liquidity is.
will be making less and less money if we continue like that, especially if you’re a small asset manager. We were saying: maybe people will stop doing securities lending. This is quite funny, because three years ago, people were trying to manage in-house securities lending, thinking they would be able to handle it, but SFTR told them no. The good part from my perspective for SFTR and now we can build on it for CSDR is the fact that we can improve our operational setup, middle, back, and automation too. Singh: Look at the equity market where things weren’t electronic front to back. Purely from a securities lending point of view, look at the concentration that’s led to in the prime brokerage space. In the US, there are more brokerdealers. If you look at Europe, who are you lending to? There are circa four counterparties. Why do you need an agent to do that? If you’re a large asset owner, I think the four sales team should go out and say: we split it into four. I’m kind of saying something that works against me. I worked on the prime brokerage side but I’ve asked myself that question. And it’s quite interesting to see. If you keep going down this path, keep trying to look at the minutiae and trying to cover off the detail…
Dolce: I think that what we’re trying to mention is clearly that the behaviour will change. Where we are making a lot of money is not within UCITS. I’m part of a beneficial owner looking after UCITS funds, and clearly the concern is that they’re very difficult to monetise, you cannot go term. On the collateral side, the liquidity part, I’m not sure you can accept corporate bonds so that keeps you on the equity side, government bonds and cash. To summarise what we said: we will get the constraints from the pledge plus the collateral plus those from the UCITS. I think the UCITS funds
Kiely: Two words why that won’t happen: credit intermediation.
2. REGULATION UPDATE
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3. Tech: promoting ease of entry into the market Geggus: The first [area of focus] is obvious, talking about the problems of settlement and CSDR. It’s distributed ledge technology [DLT]: there’s plenty of test cases where it’s used for instantaneous settlement in markets, and there’s entrants into the securities lending market that are looking at that. It’s been around for a while, and a lot of people look at it as the crypto platform. But the benefits to it are much beyond that. Within that, we could see the efficiencies that the industry demands and is asking for so if we can get to a stage where CSDR is a memory in the past, because we have efficiency in the market and we’re utilising things like DLT, we could really harmonise the market from an efficiency standpoint. Banks have spent a huge amount of money on technology. Most tech firms end up getting bought by banks so you see investment from banks will not stop. We are becoming larger investors in technology, and we’re becoming technology companies in the amount of expenditure that has been spent on it. I think we’ll see this develop further, we’ll see the benefits from distributed ledger technology for sure. Same thing with smart contracts. When we look at the ability to update a client contract, to update triparty contracts between people – these are ripe for becoming smart contracts. If you move that into a technology-based platform, you remove the need for me to receive a letter, open it, sign it and return it manually back to someone else. The benefits of that for me are coming. What timeframe? The work that ISLA’s doing on things like common domain model to standardise things will help as Andy said earlier. Standardisation is key to that because technology is fantastic, but it has limits on how much it can process for a simple transaction. Because if we need it to do something extremely remarkable, the cost of that for a securities lending agent is too much. So as the technology develops, becomes cheaper, I’m hoping we’ll see the industry move towards that further. And then we’ll also get the benefits of things like hyper automation, which is where we can change 60% of everything that’s been done manually now, to being done automatically via a combination of AI robotics, and everyone’s spending money on it.
forms and there is no interoperability between them. In theory you can increase the efficiency, but you cannot get everyone on board. If we are talking people - because our business is people, infrastructure, and then solutions. Let’s start with the people: you need to train them. I’m not sure that all the middle office will understand blockchain, DLT in all organisations. That means that you need to put the right training in place to make sure that the majority can handle it, not only a select few. So yes, we need to work on the technology to make progress. But clearly, we still have unresolved issues on simple things like for example, matching SSIs between platforms, having two key players that cannot smoothly communicate on SFTR. We still have legacy issues that we must manage. Dyson: Andrew [Geggus], you mentioned very kindly some of the work we’re doing at ISLA. Nearly two years ago, I recognised that, partly because of the work we’re doing with SFTR, the market was quite fragmented. We couldn’t change SSIs effectively and SFTR was forcing us to think about it in a different way. We quickly came to the idea that we need to do two things. The first one was the creation of the common domain model, which essentially, is the codification of industry best practice around trading flows, lifecycle events. We need to develop and sell products and services based the quality of the service. And you do that by standardising the underlying communications language. And I think this would
Dolce: I’m going to be a bit contrarian there. I think that we all get the hype about using the technology more. But I am more with you on the first thought rather than about the ‘hyper’ part of automation, because it’s doing the easier one first. First, seriously, if we cannot handle an SSI between us on a platform, there is a problem. I want to use blockchain, DLT. I’m part of a lot of working groups pushing for that. But the challenge that we have is that it’s not standardised at all. People are creating their own plat-
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In theory you can increase the efficiency, but you cannot get everyone on board. Ernst Dolce
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then facilitate blockchain and multiple platforms. So that version of our market is now freely available through common source for people to use as the basis to start their development. And that should, in theory, deal with the issue about blockchain compatibility, etc. The other thing we’ve done is we’ve started the digitalisation of our master agreements. We’ve done the clause library: we’ve now got standard clauses that reflect outcomes, rather than a myriad of clauses that people trade to. And the next thing we will do is bring those into a digital format. It’s a step towards smart contracts. Because unless you’ve got that standardisation, you can’t have smart contracts. I think to your point, we’ve got to walk and then run a bit by doing the basics.
money out of having things like blockchain, because it means a lot less processing from their side, which means a lot lower bills from their clients. And beneficial owners are probably a million miles away from anything blockchain unfortunately, at this point in time. But trying to bring it back to something more topical, or something more real life. Just look at what happened last year, you look at Robin Hood, that was a technological investor platform that sprung up and look at the way that changed our market and the dynamics in our market. I think there’s going to be lots of iterations of technological change that are going to have some big impacts on how we lend stocks before we get to a point where we’re going to be able to start talking about how we’re going to use blockchain for securities lending.
Daswani: I think that the beauty of what you’re saying, Andy [Dyson], is that ultimately, what it translates to is ease of entry for others into the space, which is what we all want. I’ve talked about getting more clients coming in and making it easier for people to lend securities, and again, more transparency, which I think are the advantages that we would see from all of this. And I think we should all support that from that perspective.
Geggus: I take the point that blockchain is at the moment a bit of a dream for the industry, and also how we can utilise it in its full capacity. But looking at beneficial owners, their long allocations are starting to have cryptocurrency in them, that is a blockchain asset. So, for these, the demand is going to come from the beneficial owners and we as custodians, as well as other market participants are going to need to respond. They will ask how they can mobilise them rather than just being idle assets, can prime brokerages finance them for them? Whilst there is a concept model of utilising the blockchain for the benefit of industry and having some sort of super ‘Star Trek’ style settlement process, the actual blockchain itself is going to become part of our industry very soon.
Chessum: The question talks about technology changing the dynamics of the market, and we’re talking about blockchain and all things quite Star Trek in my mind. There’s a couple of things there. Custodians have to work out how they’re going to make
3. LOOKING AT TECHNOLOGY
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4. ESG: securities lending at a ‘tipping point’ Dyson: The sustainable agenda is what’s going to force our thinking to change over the foreseeable future. I think we will get to a point quite quickly, where we won’t be talking about sustainable funds, but those funds that aren’t. Securities lending and ESG: it’s a bit of a mixed bag, in many ways. There is a school of thought that suggests that security lending doesn’t work as well as it should do in the context of a sustainable agenda. Now, I wouldn’t agree with that. But to get our clients where they need to be, I think there’s a couple of intersection points that we as an industry are working on. The first one, of course, is voting. We are in a world of active shareholder engagement and the encouragement of shareholders to play a bigger role in the companies they invest in. Obviously, securities lending is such that if you lend a security, it goes out and typically the vote goes with it. We’ve published best practice in that regard to help people understand what they should and shouldn’t do, and other areas we’re working on because we see that intersection already is collateral. There’s a big debate as to the role of collateral from an ESG perspective. Some people argue it should be an exact mirror image of the type of securities that are in the fund. I don’t see that as either being practical or prudent because the danger is if you just have back what you’ve lent, in a different guise. You’re increasing your risk in your collateral pool. We shouldn’t forget that collateral is there not for fitness or ESG purposes, it’s there to mitigate loss if there’s an event. We’re beginning to see what I would call counterparty screening at the highest level. Firms are looking at each other going: we’re not going to trade with you because you finance coal stocks. And that will trickle down into our market soon, if not already. Because the already complex dynamics about lending, which include counterparty selection, could be about to get a lot more complicated, because your client might say: I can’t lend to that borrower, because we don’t like their position on coal stocks. Now, I don’t know if you’re seeing that already. But if not, that’s coming.
they’re the people that called Wirecard before anybody else did, and they were pushed back in a box constantly by the regulators. And surprise, surprise, the guys that shorted it were right. We must let them loose on ESG scrutiny as well. Kiely: And pretty much all the big fail events of the past 10 years have been called out by the short sellers before anyone else, so I think they will start to expose this. But surely there will be a form of equilibrium at some stage. I’m not saying we should do nothing and as an industry, do we want to lead the likes of Ernst and Matt? Do we want to lead you towards ESG solutions, or do we want to be forced there? For me, the biggest issue is collateral, because that’s the thorniest thing, the most difficult thing to solve. But there will be an element of self-solving about this, because the greater the bad press or negative opinion for certain assets, the less liquidity there will be in those assets. And the less liquid they are, the less we take as collateral. Davis: Today beneficial owners continue to introduce restrictive collateral sets and are restricting specific assets due to ESG. As it stands currently, ESG remains a priority within a beneficial owners lending programme. Aasly: I totally agree. It’s been a pressing issue for years with ESG funds. It’s ESG first, revenue second. The easiest solu-
Daswani: You just touched on the new terminology of green screening. But what’s your views on green washing, from the association point of view?
We’re not trying to make our programmes compliant, we will work with clients to fit in what their objectives are into our plans.
Dyson: We need to be very mindful. There is a suggestion that you can use the collateral dynamics as part of a green washing strategy. Personally, I’m not buying that one. The market has many techniques that will call out inappropriate activity. The most important one is the short sellers, because
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it means there needs to be a lot more nuance around these events. Singh: If you’re a beneficial owner, and you’re going to take a position on a given day, I think you’d be tracking that well before your agent lender should be calling it back. I don’t think you can outsource that activity. You’re [Andrew Dyson/Isla] leading the charge on this by a country mile, if I may say so. As a result, we’re sitting here today at an EU roundtable, I think we have to be cognizant of that. It is still, however, a global industry. To your point about transition, I think there has to be some bridge to that. I think there’s going to be such standardisation in the collateral market. I mean, triparty is going to play a major role, rating agencies will come up just like we’ve heard for credit rating, you’re going to have sustainability ratings, environmental ratings. But I think that we can all work towards this and I think the industry will coalesce around solutions. I think it’s the kind of front end which we are talking about the voting, that stuff is a little bit more unique to each underlying beneficial owner.
You’re going to have sustainability ratings, environmental ratings. But I think that we can all work towards this and I think the industry will coalesce around solutions Zorawar Singh
tion is just to stop lending. It’s just a nuisance. Now with new regulation on top of it, there’s even more reasons to me to say this. The work done with ISLA, and before that GPSL, and having a set of rules that you can stick to is Alpha and Omega. Suddenly you can say: look, I’m following the best practice and it has taken these things into account, it might maybe at some stage get some sort of green label on it. All of a sudden, you can prove that you’re doing the right thing. That’s really the key. And if your agent lender also supports all these initiatives, you can start moving on and regain a lot of those funds that that you lost in the ESG battle.
Dyson: I’ve talked to regulators about this. They need to think about what they want this market to look like. Because if you want this market to be deeply liquid and attractive to retail investors, you’ve got to encourage people to participate in things like securities lending, to provide that liquidity that underpins the markets. And at the moment, they’re remaining sort of silent on many issues. But the simple fact is that we need ESG funds to be lending to create the liquidity that people need to see. In terms of voting and the comment about recalling, I think it says in our best practice: we wouldn’t necessarily say that you need to do that all the time, because you don’t. Each client needs to figure out what are their dynamics and then work with you, their provider to come up with a solution that works for them.
Chessum: From a securities lending perspective, ESG is no different to any other lending mandate, it needs to follow the investment strategy of the fund, no matter what that is. ESG is just another iteration of that. You have to adhere to the spirit of the actual investment mandate, because otherwise, you’re not doing what your investors are paying for. And ESG is just that in a slightly different guise, there is a great deal of reputational risk around greenwashing however and you have to be very careful in terms of the operations that you’re carrying out on behalf of your underlying investors.
Dolce: I think education has a part to play here. For example, where we onboard funds, the way that we look at it is like we give the analysis without any ESG filter. We say: this is the maximum revenue, based on the current market conditions that you can realise. Now, let introduce the possibility to recall all assets in order to exercise the voting right of the funds, this is the new level of return that could be generated. Let’s add ESG constraints on the collateral now, this is the new level of return that could be generated. And after that we have an open conversation with the clients, asking them what they want. It’s very clear that you will have clients that will want to exercise their voting (on systematic basis or on discretionary basis). My personal opinion is you need to allow the clients to vote, it’s a no-brainer. On
Kiely: I’ve had RFPs recently and a couple of clients asked me if they can recall everything when there’s a vote. Now, if you’re earning a significant return for your pensioners, your investors through lending an asset, is it worth jeopardising that just to ratify something benign at an AGM? I don’t think so. But if there’s something contentious being voted on, then obviously, you should be doing the right thing. I think
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the collateral part, I agree with you Andrew [Dyson] that it’s there to protect the fund and should not have this type of high correlation with all the assets available in the funds.
The work done with ISLA, and before that GPSL, and having a set of rules that you can stick to is Alpha and Omega
Kiely: We’re responsible for the education here because there are still too many participants that see securities lending as some form of asset swap. You can’t say: I’m lending stock in an electronic carmaker and I’m taking stock in a coal fired power station as collateral, and therefore, that’s a bad thing to do. Daswani: I read many ESG papers before coming to this. And there was one sentence which summarised everything quite nicely. I read it in an RMA paper about securities lending programmes. It said that these programmes should not be viewed as ESG compliant, but they should allow investors to achieve their sustainability objectives. I think that summarises how we should be operating our securities lending programmes. We’re not trying to make our programmes compliant, we will work with clients to fit in what their objectives are into our plans. That summarises for me very beautifully how ESG should fit in, in the securities finance world. Chessum: I agree. How many asset owners lend in emerging markets and how many asset owners lend government
Martin Aasly
bonds and get corporate bonds back or in emerging markets, they take main index developed market equities as collateral back. Lending on ESG funds is no different. You wouldn’t take like-for-like, necessarily, but I do think it’s important to give it some extra consideration in terms of the types of assets that you are going to be receiving just in case, any of your underlying investors did want to have a look through as to how their fund was transacting. And they should be aware that if you are taking on non ESG assets as collateral that that is taking place. I think that’s where the legislation will probably end up. There’ll have to be some sort of language in prospectuses outlining for article eight and nine funds, how they collateralise their assets or any lending transactions.
4. THE ESG THEMATIC
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5. Final thoughts Davis: I think the theme has definitely been around efficiency. I have to agree around tokenisation when it comes to settlement efficiency. I think Andy [Dyson] touched on it earlier from a CSDR perspective: when you have loans which haven’t settled due to pending collateral, tokenisation eliminates that due to instantaneous movement, even if the CSD is closed. We discussed financing and the continued support to beneficial owners who are long or short cash. Peer to peer will continue, and although well-established, there remains continued growth for non-standard borrowers. Finally from a beneficial owner perspective, the focus has to be around APIs. Efficient reporting allows clients to review their program’s analytics real time without waiting for emails to come through, and therefore has to be a focus for 2022 and beyond. These were my key points. Geggus: For this year. Nick [Davis] mentioned efficiency, but I think this is the year where it’s actually used to determine who you want to trade with. We’ve always had difficulties with trading certain counterparts. And that’s been used as a way of saying: you need to improve here, we’re noticing you’re failing more than others. The second one is cash solutions. We spoke about it earlier, we have become a securities finance industry. And I think that once again, you’re seeing these news reports regularly about different banks, and some of the peers here, coming up with solutions for clients that are long cash, and also clients looking to raise cash. And then lastly, it’s real-time data. We spent a lot of time in the last two years implementing data depositories to the regulators for SFTR. And I think that the firms need to mobilise that more and be able to use real-time data for clients, and to use real-time data to manage programs, as opposed to waiting for systems to download things overnight. Kiely: I said earlier that over the next couple of years, lending digital assets and the tokenisation of collateral will be very important. But I think that’s a few years away. For the next 12 months, it’s looking at greater access to the retail space. I think in the next 12 months getting the retail investor access to this market will be hugely important and it will have a have a big impact. Lastly, I’d like to see this year be the end of the phrase, ‘I’m sorry, I was on mute’. Dolce: From my perspective, it’s finding a liquidity solution, and to leverage on what Sunil said at the beginning, it’s more moving from an Alpha contribution to optimisation. We are good at doing that but implement such approach for all our clients will depend on their profile. When it comes to APIs – I can’t find a better word for that.
Beneficial Owners Guide 2022
We use industrialisation internally, but I think API is the best. Clearly if we want to have something more efficient, we need to be able to plug and play, and currently we are not a plug and play industry. The final part would be a more robust operating model. We think about the client, the trading part, and we forget that the middle office and the back office are still struggling. We need a more robust operational framework as an industry. Chessum: I think this year is really going to be the year of the beneficial owner! Given what we were saying before, there’s a lot more interaction between beneficial owners now: they have to be more advanced in their way of thinking and be more involved in what’s actually happening in lending programmes. It’s good for the market and it’s good for them. And I think it makes it a more dynamic place. I think ESG is going to continue to dominate absolutely everything that we do. Where we’re talking about blockchain and tokenisation, that may be a potential solution, especially when you look at its use for ledger technology and voting, and to some of the problems that we face. I think that the fact that we’re beginning to think about it, is definitely positive. I think we’re all just going to be ESG’ed out by the end of the year. Aasly: First of all, I really hope Matthew is right. On the beneficial owner part, I do think that there is there is an increase in involvement. And on our part, a lot of our focus will be on collateral optimisation still, in an effort to utilise our clients assets optimally, in the face of mounting collateral requirements and UMR. And secondly, on sustainability and ESG, we’ve been grappling with that for years. I think that we’re practically there. We still need to educate clients, talk to them, ping pong ideas: no client is the same. I am not talking about the fund clients, but insurance and pension funds. You really need to be able to tailor this to their needs and to how rigorous they are on the ESG approach. A lot of effort is still going to be going towards that. Daswani: I would say that from my perspective of Standard Chartered and looking at the client base that we focus on, which is central banks and sovereign wealth funds, that the new liquidity solutions that we’ve spoken about today are very much what is in demand in that segment, and that client base, and I do see that continuing to grow further out with people using securities finance solutions. The second thing I’d probably say is that I hope that we can see more ease of entry. And this ties back with what we’ve
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said around retail and private investors also entering into the market, and creating a kind of Airbnb for securities finance. And lastly, what I would like to see looking forward. I look to Andrew [Dyson] on my left, and we haven’t mentioned it, but the work that the industry associations have done on how we can unify and harmonise a lot more. We sit here as an EU roundtable, but we repeatedly as global players in this field are having to deal with the same issues multiple times. And that is very costly in an environment where we’re trying to be more efficient. Dyson: I think there will be a greater involvement of the beneficial owner community in the next weeks, months and years. I think that’s driven by the sustainable agenda. Perhaps in the past, some people have taken beneficial owners for granted in programmes. And the final thing I would say: by this time next year, we’ll be talking about something quite different, which is digital regulatory reporting. And what we’re beginning to see from the regulators is: under the previous model of SFTR, they tell you a template and you create some stuff and you send it to them. And that’s just purgatory when we want to know how that is. The way this is going quite quickly now is they’re going to operate a pull model, or effectively identify the data points they want from you and your systems, and they will deliver that code to you, which you will then put into your systems and then it just extracts the information. That only
works if we’ve got standards. Luckily, we’ve got some of those.
Nearly every one of you said one word: efficiency. That’s what I’m hearing from everybody, so it’s quite telling
Singh: For me, customisation is the key. We don’t like to say that, but I think it’s very much what our clients need. We’ve talked about Andrew Dyson solutioning. I think clients want different things, and more importantly, different clients want different things, whether it’s ESG, whether it’s what they’re trying to get done in terms of revenue, or liquidity. So to me, in 22/23, all the technology trends are obviously there to stay. We have already talked about APIs and I think licence to operate is my core baseline. We’ve got to stay relevant, be compliant, efficient, I think that goes without saying. But while doing that, how do we do solutions? How do we focus on different clients, different needs, provide that customisation in a market that’s quite concentrated at the top end, and then kind of bifurcates out pretty quickly? Dyson: I am listening very carefully to what you guys said. Nearly every one of you said one word: efficiency. That’s what I’m hearing from everybody, so it’s quite telling.
5. FINAL THOUGHTS
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Americas Beneficial Owners Roundtable 2022 Global Investor/ISF met online with the main actors of the North American securities financing market on March 16. Some video clips of the conversation feature for every topic.
PARTICIPANTS Chair: Amélie Labbé, Managing director, News & Insight, Global Investor Group
Monica Damas-Shaw, Director, S&P Global Market Intelligence
Jerry May, Senior Portfolio Manager, Ohio Public Employees Retirement System (OPERS)
Justin Aldridge, Senior Vice President, Head of Agency Lending, Fidelity Investments
John Fox, Managing Director-Head of Client Management and Sales, BNY Mellon
Michael Saunders, Head of Securities Lending, Americas, BNP Paribas
Amy Dunn, Executive Director, Americas Head of Relationship Management, J.P. Morgan Agency Securities Finance
Robert Goobie, Head of Collateral Management, Fixed Income and Derivatives - Healthcare of Ontario Pension Plan (HOOPP)
Francesco Squillacioti, Senior Managing Director, Global Head of Client Management, State Street
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1. Setting the US scene
Amélie Labbé, Chair: To everyone listening today, welcome to the US Beneficial Owners Roundtable, the first one for 2022. I’m delighted to be joined by a great panel of industry experts to explore some of the latest developments in the US securities lending market. I would like to set the scene before we jump into the discussion. Recent data would suggest that activity in the Americas in 2021 - the US primarily - drove increases in lender revenue. Last year was a strong year on that front. Had we had this conversation potentially earlier this year, we would we probably would have surmised that the volatility that we saw in preceding months and the influence of the global pandemic would have given way to more stable market conditions, and a continuation of the rebound in lending activity. It’s fair to say that wider economic, financial and geopolitical factors are having an influence at the moment. I’m going to turn to you first Monica to summarise some of the recent market movements we have seen.
which surged early in the year, led by the dramatic meme stock craze in January. This was followed by the APAC specials in June, which recorded a 78% increase year-on-year. Specials as a whole rebounded in 2021, with average balances of USD 27.4 billion, an increase of 11% YoY. We continued to see a great performance from exchangetraded products and corporate bonds, which delivered considerable returns, with more diversification in top earning assets compared to previous years. In the Americas, the strength in the equity revenues for 2021 was supported by the rise in ETFs and ADR activity. ETFs continued to deliver robust earnings reaching USD 330 million in the second half, a 65% increase year-overyear. This was mainly driven by the sharp increase in average loan balances which topped the USD 100 billion mark, a 57% increase YoY. Also in the second half of 2021, conventional IPOs were the top revenue generating stocks, with Robin Hood leading the way with USD121 million and the ADR Didi Global puling in $50 million. In Europe, balances for European equity specials were notably down compared to 2020. This was due to the lack of demand for new short prospects, so there were fewer opportunities for sec lenders to enhance lending revenues. However, we saw a boost in the third quarter from the spinoff transaction in France between Vivendi and Universal Music Group. The spin-off trade in September generated about USD 130 million in revenue, which accounted for 57% of France’s total and almost 20% of the second half total revenue across Europe. In APAC, equity revenues increased 33% following the short selling bans being lifted in 2020, in part due to the 24% increase in average fees compared to the previous year. China Evergrande topped the list of APAC’s highest revenue generators, with USD25.8 million recorded in the second half.
Monica Damas-Shaw, S&P Global Market Intelligence: To set the scene for 2022 I’d like to mention some of the things that we saw in 2021. Outside of the traditional borrow demand, the European and US markets benefited from corporate events such as the trade deals, the spin-offs and the surge in SPACs, which led to a high performance globally. We did see global lendable balances remain in a steady uptrend since 2017, reaching an all-time high in November peaking at USD 37 trillion. This increase was due to a combination of both market appreciation and new entrants into the market. As you mentioned, we did see high revenues in 2021, at USD 10.9 billion, a 16% increase compared to the previous year. When we look at the factors that contributed to the revenue, we can start with the equity specials balances
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We continued to see a great performance from exchangetraded products and corporate bonds, which delivered considerable returns, with more diversification in top earning assets compared to previous years. Monica Damas-Shaw
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Despite geopolitical events, there has not been a flight to quality. This is largely due to the ample supply in the US Treasury market and the excess liquidity in the system. Amy Dunn
As we moved to 2022, the revenue for the first two months totalled USD1.6 billion with average loan balances at about USD2.8 trillion. Average utilization this year so far has been around 6.3%, but we did see an all-time low utilization of about 3.2% for global equities in January. ETFs utilization during this period has been around 13%. For corporate bonds demand continues to increase following the 2021 trend, with average balances up 37%, and average fees up 48% YoY. However, for ADRs we have seen a decline in revenue, loan balances and fees in the new year, including February’s steep drop of about 88% YoY, with a total of only USD16 million in revenue, the lowest since October 2020. Lastly, we have also seen an increase in peer-to-peer lending activity. Based on the data we currently have, in the last 18 months, our analysis showed a 200% growth in the number of peer-to-peer loans. This is only 2% of the overall loan volume that we see in the market. We see this loan activity as “additive” to the market and not a replacement for conventional lending. Chair: I’m going to turn to Amy, John, and Jerry to tell us a bit more about some of general themes and where you see demand coming from this year. Amy Dunn, J.P. Morgan: I would echo what Monica has said around the European and US markets benefiting from corporate action events as well as inflationary concerns continuing to drive demand for investment grade and high yield corporate bond ETFs. With that said, there has been a notable slowdown and some cancellations for IPOs and SPACs which will reduce the number of revenue opportunities in 2022. I would also add that the widespread volatility hasn’t translated into a significant uptick in specials... For the first two months of this year, hedge funds have been in a risk off mode. Many sitting on the side-lines, lacking conviction in single stock names. We are beginning to see the short side slowly increase. Hedge funds are beginning to take positions on certain names and sectors, namely electric vehicles, mining and energy. Despite geopolitical events, there has not been a flight to quality. This is largely due to the ample supply in the US
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Treasury market and the excess liquidity in the system. Another theme for this year will be focused on actions taken by the Fed. With this being the first rate hike in three years, we will continue to work with our clients to ensure they understand what this means for their reinvestment portfolio and associated funding costs. Finally, in terms of the reinvestment demand, issuers are taking advantage of cross currency swaps, allowing them to secure cheaper funding and creating more reinvestment opportunities for our clients. John Fox, BNY Mellon: [Amy’s comments] dovetail nicely into some initial thoughts I had. Given that a Fed rate hike is imminent – and it’s been four or five years since we have had a Fed interest rate tightening cycle – we have been and will continue to reacquaint beneficial owners that take duration risk with cash collateral with the dynamics of those tightening events. Going forward, I think it’s all about making clients and prospects aware of what types of assets are truly additive and important to securities lending activity. If we had a bumper sticker in our industry, it would be: Not all assets are created equal. I know that sounds a little obvious. But equities, and the types of equities that beneficial owners or prospects have, were very keen to look at and analyze, particularly given the risk profile that they want to subject this activity to by a securities lending agent. And then, almost at the opposite end of the risk pyramid: small cap equities, ETFs, high yield corporate bonds, and stats that Monica mentioned in her opening comments, certain markets like Korea and Taiwan, where we understand the returns were up 400% in 2021 versus 2020 are also very attractive to securities lending agents. Another point I would make would be that client flexibility, which is a recurring theme, continues. A little bit of flexibility can mean a lot. There continue to be additional opportunities and new types of collateral sets that are presenting themselves for the clients that can permit that on the non-cash collateral side. Continuing to be engaged with beneficial owners, and those opportunities presenting themselves, is something that’s very important throughout the remainder of this year. Jerry May, OPERS: We are monitoring closely the macroeconomic environment. Does the Fed have room to move? If so, how much and how fast? Because if you look at the numbers, it does appear that we are not recessionary but certainly in a slowdown. It’ll be interesting to see with the environment slowing down economically and with the Fed on the move and inflation high, what the market holds in that regard. It’s important to remember, at least for us and for other beneficial owners who do securities lending versus cash collateral, that it’s an asset liability management tool. With that, you get to manage both sides of the equa-
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tion. The liability has not gone up significantly in terms of the rebate rate that you would pay a borrower. But on the asset side, we are seeing opportunities on the reinvestment of cash. There are opportunities in the market right now and significant ones if you’re cognizant of the risk that you’re taking in that regard. Robert Goobie, HOOPP: From a business line perspective, I take a view from multiple lenses - equity financing, traditional security lending, FX basis, fixed income repo, and reinvesting cash in money market. For the equity funding business, 2021 was a year where the market continued to rally. Bank balance sheets were constrained, and prime brokers were also constrained. As a result, we saw funding levels for equities at Fed Fund plus 40 on average, which was a better place to invest than in reverse repo which was at sub-Fed Fund levels. At yearend, equity funding spreads widened as much as Fed Fund plus 135 to 145 for one month, creating Alpha-generating opportunities. What do we expect in 2022? So far, we see equity funding at Fed Fund plus 15-20, which is a big reduction from the year-end levels. Ultimately, this means limited opportunities to generate Alpha in the equity financing space. If the market continues to sell off and remain volatile, spreads will continue to compress in 2022, and it will remain chal-
If the market continues to sell off and remain volatile, spreads will continue to compress in 2022, and it will remain challenging to continue generating Alpha in this area of the business. Robert Goobie
lenging to continue generating Alpha in this area of the business. In terms of the securities lending market, I am uncertain about what the future holds, but specials are very limited and the GC business is steady to slow. With that in mind, buy-side organizations will need to be very nimble and take advantage of opportunities where they can. For example, market participants may consider looking at the FX basis more closely. We recently saw the basis between JPY and USD widening, creating opportunities there. In terms of commercial paper, we saw spreads compress in 2021. They are widening now, as Jerry mentioned, which means there are opportunities to reinvest the cash. And as Amy mentioned, there are anticipated rate hikes, so we could potentially take views on that. It means perhaps taking on more credit risk and interest rate risk now in the short end.
US BENEFICIAL OWNERS ROUNDTABLE 2022
1. SETTING THE US SCENE
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2. The US regulatory agenda
Chair: Let’s look at regulation. From the conversations we had last week, a number of you pointed out the heavy regulatory calendar for the US market this year, with some regulation being reviewed, or coming into force. Francesco and Amy – can you give feedback from the agent lender side, and Justin - from the asset manager side. Could you tell us a bit more about what your expectation of the effects of these various new sets of proposed rules? Dunn: I think we can all agree that SEC proposal 10c-1, SEC proposal on enhanced reporting of proxy voting, as well as the transition to a T+1 settlement cycle are the most relevant as it relates to the current regulatory calendar. For 10c-1, from our view, there are several areas of concern or places where we believe further clarification is required. First, the SEC has proposed reporting every 15 minutes, which is practically and systematically unrealistic. Clarification is also required around what link in the chain is responsible to report: Is it the agent? Is it the lender? Is it the dealer? The answer will have a significant impact on the responsible party’s development costs and resource allocation. There’s also a requirement to report client inventory. This number will not reflect programme parameters or restrictions and would result in overstating availability. For example, a US registered investment company has a 33 1/3 NAV limit. When reported, it would appear that all securities for each individual fund are available for loan, when in reality, only 33 1/3 of those assets are available after applying the NAV restriction.
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Francesco Squillacioti, State Street: I agree with Amy’s points on 10c-1. We support transparency. There’s reporting that goes on now, with respect to SFTR. The 15-minute window, though, as Amy mentioned, isn’t realistic. It’s not even representative of how the market works. That’s one of the points that we’re trying to raise with the SEC. I think Amy mentioned this as well, but the reporting of client lendable assets could have a little bit of a chilling effect on their willingness to have assets in a lending programme, which can hurt liquidity. These are among some of the items that that we’re also trying to highlight, I think we’re pretty much in lockstep with some of those points. Justin Aldridge, Fidelity: Our clients are asset management companies, and I reside on the agent lender side, so I am speaking on behalf of the agent lender and our experiences with our clients. But I agree with both what Cesco and Amy said. I do think that all of the proposed regulations are well intended and have benefits from a risk mitigation perspective.
I do think that all of the proposed regulations are well intended and have benefits from a risk mitigation perspective. Justin Aldridge
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I think everyone is in favour of transparency and there is a good amount of transparency in our industry today. It has come a long way since the early 2000s with the advent of all these different data providers. There are three really solid data providers in the market today. Based on what I’ve read from the Commissioners and the SEC, and what their intentions are, it’s about getting that data to be widespread to other investors who don’t have access to it. Under the current model, the participants in the market today have transparency. If you’re a beneficial owner, you’re seeing your performance, you’re being benchmarked. You’re an agent lender, you’re seeing it. And also, obviously, the prime brokers who are borrowing are seeing that data. That data is out there. The point that Amy made is that yes, what they’ve proposed isn’t perfect, but I think in the end with the feedback from the industry, we’ll get to the right place. And it will add value. That disparity of the data not making it to all investors, not necessarily the direct participants, is a benefit to the markets. The proposed proxy rules will have a negative impact on availability in the market. But I think they are well intentioned, and the transparency is probably necessary. It’s what the agent lender community will need to provide for their clients is the ability to customize their programme individualistically for each client: you won’t be able to service them in the masses, each client’s opinion on voting and what they should be voting is going to be unique and different. And we as agent lenders need to provide them with the ability to restrict their programme for different securities based on different market elements and data parameters to assist them with their lending programme. In the end, inevitably, it will reduce the availability in the market. But I think it’s well intentioned. One thing to add about my concerns on 10c-1. It’s not necessarily about overstating the availability in the market: while that is not good, I think the biggest concern for us and for our clients is if that’s going out on a regular basis. If our clients are accumulating positions in the open market, that’s going to start getting telegraphed in the securities lending data. We would be of the recommendation that whatever they make available should be the “actual” availability that would go into the programme. They may have programme parameters that they don’t lend small caps or over certain market capitalizations: these should be removed from the availability based on their parameters. They should also be able to mask some of that availability, because I think there is some information leakage there that could potentially harm the investment managers with their trading decisions.
One thing that’s very clearly a prerequisite for most regulation going forward, and it’s been a building trend, is that there is a fair amount of technology involved. John Fox
ing event. Others consider the cost of recalling. Will there be demand to relend post record date? If so, at what level? Is the fund a major shareholder? Will the fund’s overall holding influence the vote? Is the fund an ESG specific fund? These are all important factors that would need to be captured for the reporting to be meaningful. Aldridge: Amy, you bring up a good point, from the borrower community, the people that are borrowing these assets. If you have clients on your platform that are habitually recalling these proxy items, they’re going to want to be made aware of that, they’re going to want that client’s assets segregated from the programme, and for it to be known when they’re executing a transaction. ‘This loan we’re making to its proxy sensitive and is likely to be recalled.’ It’s going to diminish the value of that portfolio in the lending market, and that’s the unintended consequences of this additional transparency and enforcing that decision. Dunn: Agreed. The underlying shareholders will ultimately be disadvantaged as borrowers prioritize other lenders that do not have the same restrictions. Some lenders believe it takes too much time, resources and energy to fully understand the regulation and decide it’s easier not to lend. This is why it is so important for us to spend the time with our clients to reiterate that securities lending and proxy regulation can co-exist. We need to arm them with the right resources, so they understand the regulation, the impact to their program and the options available. For example, there is room for flexibility; proxy voting does not require an all or nothing approach - recalls can be based on specific criteria such as the event type, materiality or revenue.
In the last year, the industry has been going through a phase of adapting to the new guidelines and making the submission of data more standard, which will consequently result in outputs being more consistent and will also result in more accurate performance results.
Dunn: If I could expand on what Justin said regarding proxy voting. In isolation, one data point does not tell the full story of why a lender would or would not recall for a proxy vote. There are a number of considerations that go into the decision-making process. Some weigh the value of the securities lending revenue versus the materiality of the upcom-
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Monica Damas-Shaw
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Our eyes are on the revision to SEC Rule 2a-7 and the concept of swing pricing, and the impact that may have on the traditional short term interest rate markets Michael Saunders
Fox: One thing that’s very clearly a prerequisite for most regulation going forward, and it’s been a building trend, is that there is a fair amount of technology involved. Different agents will respond differently to that, given the current technology they have, their ability and how quickly they can close those gaps, and whether they require capital expense to do that. We have T+1 on the horizon as an example – not this year, but it’ll happen quickly. Damas-Shaw: Although it is not a regulation, ISLA released a set of industry standards at the end of 2020, for the submission of data, and to eliminate the inconsistencies with the data inputs. In the last year, the industry has been going through a phase of adapting to the new guidelines and making the submission of data more standard, which will con-
sequently result in outputs being more consistent and will also result in more accurate performance results. We expect a deadline for lenders to adhere to these guidelines towards the end of the year. From our side, we have made all the technology changes to allow our clients to submit the data, which will be compliant with the new SLPM guidelines. Michael Saunders, BNP Paribas: I wanted to add one other point on the regulatory front, because it was spoken about earlier, when we were discussing cash reinvestment. Our eyes are on the revision to SEC Rule 2a-7 and the concept of swing pricing, and the impact that may have on the traditional short term interest rate markets, as well as how clients will view, and what their risk tolerance is for, these proposed changes. The increased liquidity parameters under the proposal are all fine. It prevents and protects the funds themselves. But from a beneficial owner perspective, and even in some cases, an agent perspective, this concept of swing pricing can be somewhat challenging, with the idea being that some clients may opt to dial back, reduce their risk tolerance for short term cash reinvestment. They could opt for a variety of options, either managing that cash in an unregulated fund, or moving away or out of prime money market funds and into government only or some sort of other short term reinvestment product.
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2. THE US REGULATORY AGENDA
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3. The tech road ahead bution of assets globally, or finding new counterparties that historically you haven’t done business with. That’s where, we’re spending a fair amount of both capital and resources to implement that into our lending programme. Some of it is developed on a proprietary basis. But what we found is utilizing a hybrid approach, coupling vendors that exist today - some only for a year or two - with the proprietary development internally, so that all of our systems throughout the bank can talk to one another, we can give our clients the reporting and offer the transparency that many require. So that’s really what what’s going on and what we’re seeing from our client base here at BNP.
Chair: One topic that John touched upon was tech and what the market is working on to reduce fragmentation, lower risks, and promote interconnectedness and more integrated data. Mike, I’m going to sort of turn to you first to answer this question: where do you believe technology can have the most impact and be the most efficient, as well? Saunders: It’s no secret that for our business, the securities finance business, technology is a great additive product set. What we can do more of with less people, what we can do it faster, how we can do it more efficiently. It’s important certainly for high volume, low spread types of businesses that effectively manage on their own, whether it’s through the current set of vendors that are in the space today, whether it’s an internal developed proprietary system, to distribute inventory, execution recalls, proxy notices, etc. That is all where we’re focusing our time and attention. In addition to that, where we’ve put a fair amount of capital to work, and a lot of hours and analysis, has been around what I call liquidity discovery. So analyzing, looking at a lot of the various fintechs, or providers in the space, that can bring that liquidity or help discover that liquidity for certain products, whether it’s US Treasury or collateral transformation, distri-
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Fox: I think lending agents on the panel are challenged with making decisions around capital, and where we can lead digital disruption within what is a voice-driven industry as it relates to trading capabilities. We make short-term decisions on where capital is deployed, recognizing that we may pivot from that if market conditions dictate this. We try to make our best educated guess on where to deploy that capital. I think something that’s become increasingly important, and Mike made mention of this, is when you think about client experience: Traditionally we have focused on the what and who – what we lend, who borrows what. I think we’ll see greater focus in the future on trying to answer the question of why certain securities are being borrowed. I think we’ll put a fair amount of intellectual capital into trying to answer those questions going forward for clients as it relates to the types of arbitrage that may be driving particular demand in certain security types. That’s pretty exciting, because it creates some additional color for a beneficial owner that may be applicable elsewhere, as they manage their pension, their mutual fund, whatever type of client they are. Goobie: On the topic of technology, there is a necessity to shift and dedicate capital and resources to innovation and technology to manage ongoing market developments. We enhanced our in-house collateral management system, Funding and Liquidity Asset Servicing at HOOPP (FLASH),
There is a necessity to shift and dedicate capital and resources to innovation and technology to manage ongoing market developments Robert Goobie
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to deal with the uncleared margin rules that went live in September 2021. Some buy-side organizations chose to outsource their technology, but we decided to build internally. FLASH is built on a simple premise. Every position tells a story, and the system tells that story. Which position is it? Where can it be used? How and when? Execution of a trade from the front end is not complicated, but the advancement of technology that helps create efficient workflows between the front office, back office and custodian banks is an important focus for us. We also focus on building websites and technology where we can connect directly with our market participants by providing access to our portal. This makes the process seamless. Technologies that focus on straight-through-processing are one of our key mandates right now as well. The traditional financial industry could learn from the technological developments taking place in Decentralized Finance (DeFi). There is an intrinsic connection between the two. In two to five years, we may start moving away from the more traditional technological space and into a modern blockchain-type environment. Once we move to that type of environment, we will gain more operational efficiencies. Damas-Shaw: From our side, we continue to spend and invest in creating solutions to increase transparency and help clients with the governance aspect of their programmes. We recently developed a loan evaluation report to provide more
It’s no secret that for our business, the securities finance business, technology is a great additive product set. Michael Saunders
clarity on the loan with upcoming AGMs. We take our securities finance data, as well as data from other businesses within S&P (corporate actions data and ESG data) to create this report. What the report does is provide details on a loan position which includes lendable, value on loan, utilization, lendable as a percentage of the market outstanding, including the revenue currently being generated in that position. It will also calculate the recall risk (based on the number of days it would take a security being recalled to be returned v the number of days to an upcoming meeting date). And will also include the ESG score, which is based on our ESG data. The purpose of the report is to give the clients a full picture of the loan position and enough transparency to assist with their decision of when, and if to recall a security in order to vote.
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3. THE TECH ROAD AHEAD
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4. ESG: a work in progress Chair: One topic that we spent the most time debating during the EU roundtable is ESG and sustainability. I’m going to turn to you, Francesco, Michael and Justin to have your perspective on it. Squillacioti: It’s definitely the case that we’ve seen a lot of growing interest in ESG. The US may have been lagging Europe and Asia somewhat but it’s coming back strongly. Things like proxy voting, which we touched on earlier, with respect to some of the regulation. We are driving and our clients are driving to have a bit more surgical precision in terms of recalls, and the ability to recall and how these are effectuated. Understanding elements of what makes a vote material and having those influence or inform that recall process is certainly something that we’re getting a lot of attention among our client base. The other big area is around collateral. We’re trying to give clients options in the cash collateral space to have a bit of a ESG flavour to what we can do with the cash reinvestment. I think more of the complexity lies in the non-cash space, where clients have different views on what would constitute ESG appropriate activities in their view. We’re trying really to translate those into collateral sets. There’s a drive to find the most efficient way to run a programme where we can help support a client’s ESG views and express those in their non-cash collateral sets, and also have that manageable so that it’s something that’s scalable across a broad programme. Saunders: I would echo the comments from Cesco. Certainly, ESG is a topic on every agenda meeting, whether it’s internal or external, with clients or prospects. One of the probably continuous trends that we’ve seen is that in a lot of our discussions with beneficial owners, it’s become relatively clear that the beneficial owners themselves are in the midst of creating their own internal ESG policies. They are looking for some guidance in that. Now, of course, that’s a broad sweeping statement, and there are several or many beneficial owners that have a defined strategy. But what we see with clients is that they are simply in the process or in the midst of defining their own ESG criteria, and seeing how that fits into all of the other product sets that they may have, including securities lending, securities finance, collateral management, whatever it may be. It’s about working with these clients to help them define their own internal strategies and explaining to them what can and can’t be done in today’s market. If you look at noncash transactions, a lot of the counterparties would need to have the ability to at least refine - or the tri-party custodial banks, if you’re operating on a tri-party basis, would need to have - the infrastructure that the counterparty or tri or agent can quickly sift through the pool of available or eligible col-
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lateral. In theory, it almost creates a new collateral bucket, if you wanted to look at the securities financing world in that light. You would have equities and everything in one collateral bucket, Treasuries or government bonds in another, and then you have this third bucket that is ESG. That’s where the agent, the beneficial owner, and I would argue the counterparty in the transaction, need to have that ability to differentiate between that collateral. Someone used the term earlier a marriage of technology with the industry. It’d be an understatement to say that it’s not true in when applying ESG criteria and standards to securities lending. I do feel, working for a European bank, that ESG is front and centre. I would imagine it’s gaining traction with a lot of the folks on this call and in your subscriber base or the audience of this article. I’d like to think that we’ve got maybe a step or a half step ahead of maybe some of our peers or the industry, and really taking that European flavour and this focus of ESG, and hopefully trying to implement that to beneficial owners worldwide, also here in the US. Squillacioti: To touch on a good point Mike made. There could be trade-offs with ESG and securities lending. The industry is evolving to adapt to it. Some of the restrictions around collateral to encompass ESG views could mean that there could be a trade-off with revenue. We’re also trying to be clear with clients and transparent with them that as we look to implement their ESG strategies in the securities lending programme, there could be knock on effects in terms of what the revenue is. Dunn: I think the idea of standardizing ESG is a difficult one because ESG can mean different things to different people. The way one lender interprets it can be vastly different than another’s interpretation. The difficulty is attempting to identify a solution when there are so many unknowns. At the same time, you need to ensure your technology and resources are deployed effectively and the solution is scalable. Fox: Amy, to your point, there are a lot of inconsistencies with regard to how various data providers grade different
We’re trying to give clients options in the cash collateral space to have a bit of a ESG flavour to what we can do with the cash reinvestment. Francesco Squillacioti
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companies. FactSet, for Tesla, for example, will have a very low score, and MSCI will have a very high score. To the point about impact, as beneficial owners define what the credentials are going to be for their ESG policy, it may even come down to counterparties that they feel that they need to restrict, just because they’re falling short on some ESG principles such as climate change. Aldridge: We largely are supporting ‘40 Act funds and our prospective customers are generally registered ‘40 Act’s. The collateral piece really doesn’t come up at this point, given that there’s not a lot of collateral flexibility for those types of lenders - it’s cash or US Treasuries and agencies. Unless those come into scope into ESG, I think it’s pretty benign for our clientele. Ultimately, when equities become acceptable collateral (presuming that happens with 15c-3 and going forward) there’ll be some work to be done on the collateral side and what you would accept on that front. But I think that’s much easier than the fixed income instruments would be as Cesco said earlier, so our focus has really been on the proxy voting side of it. Amy hit on this, and everyone’s hit on it: the platforms and the agent lenders just need customization because there’s no standardized approach to ESG. Every client is going to have a different view and a different lens on how they view ESG, until it’s standardized. We are offering complete flexibility
with the programme. The technology stack that we have developed allows us to offer high customization, where folks can change the parameters on any security based on any data market element that’s out there. We can use that to meet their needs, as they’re thinking about ESG. To complement that, we’ve created a tool for free proxy screening - another Fidelity product called PB Optimize. It is very similar to what Monica said S&P is creating. It allows our customers to manage their securities lending programme and really serves as governance. They can set the parameters in there to highlight the things they would like to recall and to instruct the agent. The platform is built to be able to support multiple agents. For customers that have multiple agents, they’ll be able to manage the proxy screening for all their providers and create the customization that they need. Now, maybe their provider might not be able to support that customization, but we’ll be able to derive from the calculations and the algorithms is sending a list at a bare minimum of the names that they would like to restrict based on the parameters that they devised. We’ve worked in partnership with many third-party data providers for market data elements, including ESG, proxy scores and confidence scores on those proxy record dates. We think it’s very critical going forward that people need to manage this and document the decisions that they’ve made around lending, around proxy, given the new regulations that may be coming down the line.
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4. ESG: A WORK IN PROGRESS
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5. Looking to the future Fox: I think for the agents that are here, what we think about constantly is what are the tools that we need that create an outperformance versus our peers, not only in revenue, but also, again, client experience. Squillacioti: John said it early on: while we’re looking to drive growth, not all securities are created equally. Looking to drive growth in a very efficient way, both with respect to capital that’s being used to support the activity and how we run the programme. There’s a lot going on geopolitically and with the Fed. Those will certainly be a backdrop for everything that we do over the course of the year. There will be continued focus on things like ESG, and how that rolls out across the global client base that we have here, especially in the US. We are also looking at things like peer-to-peer as another tool in various aspects of our programme, and how we can use that to drive some growth for client revenue. Goobie: Peer-to-peer trading will continue to grow and evolve, especially with the establishment of the Global Peer Financing Association (GPFA) in 2020. GPFA’s rapid membership growth has exceeded expectations and fills a gap in the beneficial owner community that currently exists. In terms of technology, there will be an increased focus and investment in technology to meet regulatory demands and capture operational efficiencies. I also believe we will see agents increasing their agencybusinesses as opposed to the principal model, due to an increase in capital costs. And finally, there could potentially be development in the marketplace in coming years where we re-think our approach to indemnification. The technology could exist at some point, where peers trade and receive indemnification at a trade level. This could provide capital relief to financial institutions, as indemnification carries substantial capital costs. Aldridge: We’re very optimistic for securities lending on a go forward basis, despite the regulations and the challenges in the market. I think we’ve all proven over the last 10 to 15 years that the market is very resilient. It’s continued to improve and evolve. That’s being driven by technology, which is a heavy focus for us here at Fidelity. We continue to focus on the pain points of investment managers, and continue to work on the proxy management tools. We’re certainly focused on benchmarking and transparency, and providing unique tools so they can decide how they should be lending in the programme and evaluating their providers as they are today. Another area that we’re focused on which we think will
Beneficial Owners Guide 2022
garner more interest on a go forward basis, given the compression and management fees, is qualified dividend income [QDI] management. This became a huge pain point last year, when a lot of significant events in the securities lending market impacted QDI. Folks were limited on their opportunities, because they weren’t being managed appropriately. We’re spending a lot of time focusing on that. Management fees are coming down so the QD limits and expenses are lower. It’s getting more difficult and challenging when you have that type of sensitivity. Dunn: John mentioned it earlier, if clients want to remain relevant and competitive in this environment, they need to allow for greater flexibility. There are a limited number of levers at our disposal, the more levers approved, the better positioned lenders are to obtain the next revenue opportunity. The further you move away from the standard, the less attractive lenders become to the borrowing community. I consistently engage my clients on programme changes such as: cash flexibility: do they approve both cash and non-cash? As it relates to non-cash, are they exploring all available collateral types? Are they willing to consider more expansive reinvestment guidelines? Are they optimizing returns in a rising rate interest environment? Are there new borrowers or markets that need to be considered? What is the view on proxy voting? Have we explored all options available? These are important discussions because slight tweaks in this market could translate into meaningful returns. May: So far in 2022, it’s been reiterated that this is a global market. That’s not just geographic, it’s also across different sectors. What is happening in the commodity sector recently has impacted the financing sector, and what happens in the private markets is something that has an influence on the liquidity markets. This has been reiterated to us. As a result, the primary risk that we concern ourselves with is the liquidity risk. From the great financial crisis in 2007/8 to March of 2020 to today, it just periodically
From the great financial crisis in 2007/8 to March of 2020 to today, it just periodically gets reinforced that liquidity risk is a significant risk for our plans Jerry May
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I consistently engage my clients on programme changes such as: cash flexibility: do they approve both cash and non-cash? As it relates to non-cash, are they exploring all available collateral types? Michael Saunders
gets reinforced that liquidity risk is a significant risk for our plans. This involves whether we want to lend Treasuries, how much we want to lend of our Treasuries, and the impact upon cash reinvestment. And this ties into what Monica and Rob have mentioned, with peer-to-peer securities lending, where we’re able to do some lending that’s going to be stable with some entities that are not regulated like banks or traditional borrowers have been. All of those things factor into what we foresee for 2022 and playing out for the rest of this year. Damas-Shaw: We continue to make significant investments to enhance the depth and the quality of our data, the analytics and the infrastructure, in order to improve
the product performance and the overall client experience. However, we do not see ourselves, as a provider of data and analytics only, we have seen our business go through an evolution towards a more solutions-based approach, where we look to provide more innovative and relevant solutions to all the client segments. For beneficial owners, we continue to create solutions to assist with the oversight management of their lending programmes. We recently released a compliance check tool to provide exception-based monitoring of a client’s lending parameters in their lending programs. We are also working an onboarding tool to assist with the ALD process which can be used by both lenders and the borrowers. We continue to upgrade our intraday capabilities for the trading desks. As previously said, we are always looking for ways to assist and provide solutions for all the different segments in the securities finance space. Saunders: If there’s one key trend that I’ve picked up on, it’s this idea of transparency. With all the changes in the market, whether regulatory, or the increase in the use of technology, or ESG, clients are looking for information. The more transparent and open we can be will only assist the greater industry. The final word for me is to remain nimble, as an industry, as an agent, as a beneficial owner, and open to any changes, whether they be guidelines or new policies, regulations, etc.
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5. LOOKING TO THE FUTURE
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The view from Canada Kyle Kolasingh, Director, Securities Finance at RBC Investor & Treasury Services. owners due to their diversified global characteristics. Recently, SFTR and CSDR has had an equally significant impact from a reporting and behavioural perspective to any beneficial owner invested within Europe. We are also looking at some of the proposed rules coming out of the US including the SEC’s proposed new Rule 10c-1 and Rule 13f-1, which can also impact the Canadian securities financing landscape. It is still too early to speculate precisely how these proposed changes will affect Canadian beneficial owners or the Canadian market of lendable securities. It could have an impact on reporting requirements (similar to SFTR for offshore entities) and on demand to borrow from US counterparties, from which a significant portion of demand is derived. As the industry progresses through these SEC consultations and more information comes to the market, we’ll have a better understanding as to how it will impact both the agent lenders and the beneficial owners themselves. That said at the start of the year in Canada we recently saw additional guidance from the CSA via its Staff Notice 81-334 on ESG Related Investment Fund disclosures. In a very similar fashion of SFDR, this guidance on the disclosure practices of investment funds as it relates to ESG aims to reduce the potential for “greenwashing”. Lastly, T+1 is a very hot topic across the Canadian securities industry and will have applications to securities finance as it did when we moved from T+3 to T+2 in 2017. It is still early days but all indications are leading towards a H1 2024 timeline, which is expected to be conducted simultaneously and in conjunction with the US T+1 implementation; given the interconnectivity of the Canadian and US markets. The Canadian Capital Markets Association is leading this charge.
What has activity been like in the Canadian market in the past two years? The Canadian fixed income market saw a bit of suppression in 2020 on the back of the economic conditions surrounding the pandemic, but has rallied back in the past year. In early 2021 we started to see a lot more activity, particularly demand for term structures, which is now stronger than pre-pandemic levels. Demand in this category of level 1 assets (both in sovereign and provincial issues) steadily increased over the year; particularly in term structures initially on a 35day basis, but more recently extending beyond 95-days. Expectations in 2022 are for an increase in demand driven by a hawkish interest rate environment. This is reminiscent of pre-pandemic conditions where we witnessed six-month, nine-month or 12-month term structures, which were predicated off the back liquidity and funding requirements. The equity market has had a bit of a different path. The cannabis space pre-pandemic drove significant portions of revenue in the Canadian equity market. Since then, we’ve seen lower demand for specials with the same level of conviction. There have been a few corporate events, mainly event driven specials, which have popped up but nothing that has had persistently high levels as the directional interest in the cannabis sector. An interesting development is the ETF space which has heated up in the last two years and continues to be a lucrative category of lending opportunities both at home in Canada and in the US; albeit driven by differing conditions. US ETF demand is driven by hedging activity against increasing interest rates compared to in Canada where demand for ETFs is driven by hedging against broad based market volatility. One key market driver is regulation. What is currently making an impact in Canada, or expected to influence activity there in the next few months? While we may not have seen significant home grown regulatory change in the last couple of years, the global regulatory landscape continues to play a very important part in the securities lending activity of Canadian beneficial
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While ESG is on the radar of many market participants, it’s not something that people are expecting to have an immediate impact like it is having in Europe. What’s the situation in Canada? Personally, I find ESG fascinating because of how it has recently evolved and its interpretation, application
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and intersection with all levels of our industry – either abroad or at home. The governance aspect of ESG has for the most part been at the forefront of the conversation within the securities financing industry. The ability to apply and promote good corporate governance has been a non-issue for securities lending for more than a decade. It is important for beneficial owners to know that options are available depending on their own requirements and through discussions with their agent lenders. For example a securities lending and an ESG strategy integrating active corporate governance policies is feasible. This is an area across the industry that we need to vocalise and promote greater understanding. The recently formed Global Alliance of Securities Lending Associations (GASLA) is leading the charge. The next item on the ESG agenda is going to be collateral management, and I think it’s an important time to be discussing this with Canadian beneficial owners. Collectively the industry is working towards common best practices and guidelines to ensure the increasingly sophisticated needs of beneficial owners meet the capabilities of all industry players; agent lenders and tri-party collateral agents in particular. The difficulty in application may lie more on the wide ranging applications to collateral sets and schedules as beneficial owners define their own ESG strategies and policies. I expect ESG and its varying applications to become more integrated into one’s investment strategy and philosophy as beneficial owners take not only a view on corporate governance but also their fiduciary responsibility, evaluating revenue impacts and potential in as much importance as the ability to vote proxy. This is no different outside of Canada.
life cycle; whether that is upfront in execution to the administrative/reconciliation/downstream life cycle movements of loan transactions. Not only is this driving further cost and benefit growth via higher STP, it is also creating valuable efficiencies to operational processes which not only is monetized but also has a positive impact in overall beneficial owner experience. Another interesting area in applying emerging technologies is in targeting new areas of untapped lendable inventory such as the fully lending space. In recent years, Investment Industry Regulatory Organization of Canada’s (iiROC) rules on fully lending have come into fruition, balancing Canada with the US in providing securities lending to the retail investor. It is in this space where fintechs and emerging technologies play an important role. While the premise is the same, the operational and legal side of the transaction can be very different than the typical beneficial owner structure. What themes do you expect are going to dominate your market this year? General market sentiment remains positive. The market recovery in 2021 and record level M&A activities could continue to perpetuate into 2022 presenting further optionality-driven demand and event-driven optimization opportunities. While general collateral for both fixed income and equities continues to increase (in comparative revenue proportionality) changes to pricing conditions is not expected in the short term given liquidity. Additionally, the interest rate environment in Canada and more broadly speaking across North America will be closely monitored especially as changes to the Overnight Reverse Repo (ORR) operation facilitated by the Bank of Canada shape out. Collateral is readily available and pricing is set to remain steady in both financing and repo markets. Lastly, for beneficial owners the integration of securities lending activities into fully formed ESG policies will continue to dominate 2022, as applications and expectations become clearer. Ultimately, it is encouraging to see more ESG funds enter the lending market as it points to the fact that both can work in harmony.
A theme that is also at the forefront of conversations is the role that technology plays in securities lending. Where do you think tech can make the most impact and where are you investing? Technology has been at the forefront of applying reporting and regulatory changes such as SFTR and the same is expected for Rule 10c-1. This has been mostly, if not all led, by progress in enhancements and new developments by the fintechs across the securities financing industry. We first saw this in SFTR but we will continue to see greater usage in readily available technology to facilitate future regulatory reporting capabilities in North America for example Rule 10c-1 and beyond. This is directly correlated to the momentum for greater transparency across the global industry, affecting beneficial owners in Canada as well. These technological developments continue to create significant value in both front and back office capabilities by providing products that enable greater automation in the loan
Beneficial Owners Guide 2022
Kyle Kolasingh is Director, Securities Finance at RBC Investor & Treasury Services. He has worked for RBC Investor & Treasury Services for nearly 12 years and been part of its securities finance team since 2016. He focuses on global product development and oversees relationship management & business development for beneficial owners in the Americas, the Middle East and Asia Pacific.
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