Beneficial Owners Guide 2023

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Global Investor (USPS No 001-182) is a full service business website and e-news facility with supplementary printed magazines, published by Delinian Limited. ISSN 0951-3604

J.P. Morgan retains top spot

Global Investor/ISF’s Beneficial Owners Survey 2023 edition recognised 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. Only three firms qualified in the lender categories this year.

Global bank J.P. Morgan returned again this year to win the global weighted and unweighted categories, winning the top prize in two of the three regions: Europe, the Middle East and Africa (EMEA) and the Americas.

While RBC Investor & Treasury Services’ scores in the global categories were down on last year’s totals, the Canada-headquartered lender made the top three in this year’s rankings.

State Street took the final spot in the top three global lender lists and came out top in the Asia Pacific region.

J.P. Morgan

One respondent to the survey noted that the US lender ‘continues to be a leader in navigating the ever-changing market environment’, setting the backdrop for J.P. Morgan’s win across multiple categories again this year.

It scooped up the top prize again this year in the weighted category, scoring the highest global totals in Americas (7.07) and EMEA (6.98), both down slightly on 2022’s figures. The bank scored 6.13 in the Asia Pacific weighted list, also lower

RESPONDENTS:

This year’s survey saw nearly two-thirds (62%) of respondents originate from the asset manager or mutual fund space, up on last year’s representation (54%). Respondents also comprised public and private pension funds (22%), insurance companies (14%) as well as trust banks and corporations.

Nearly half the respondent firms reported assets under management (AuM) valued at more than $100bn, with the remainder spread out quite evenly over the $1bn to $90bn brackets. The remainder had AuM under $10bn.

Three-quarters of respondents said they use only one single provider, while the remainder used two or more.

than last year, but making it the second best-rated lender in that region behind State Street. The firm’s global average rating across the three regions, at 6.40, also continued a slight downward trend.

In the unweighted category, J.P. Morgan had the highest unweighted scores in EMEA (6.98), an improvement on last year, and in the Americas (6.72). Again, in Asia Pacific, it was only one of two lenders to quality, and ranked in second place. On an average basis, a score of 6.79, though down in 2022 meant it returned to levels seen in 2020 and 2021 (6.69 and 6.8 respectively).

As a custodial lender, J.P. Morgan secured the top spots on both an unweighted (20.56) as a global total) and weighted (19.59) basis. Again, it achieved the highest scores in EMEA and Americas.

It scored top marks with respondents in all 12 service categories outlined the unweighted category. In the weighted part of the survey, it was recognised for its Programme Customisation, the Provision of Market and Regulatory Updates and its Relationship Management capabilities.

J.P. Morgan also received recognition as top agent lender

Like previous year results, respondents showed a differing appetite for lending. The number of firms lending up to $1bn was similar to making available between $2bn and $3bn and between $5bn and $7bn.

Of the key challenges outlined, a few respondents singled out the upcoming regulatory challenges lying ahead including the SEC’s US settlement cycle moving to T+1 in May 2024 and the impact on security recalls, and the new proxy and loan disclosure requirements. Ongoing market turbulences were also highlighted as an issue.

in the EMEA and Americas regions, in the weighted and unweighted categories, which also enabled it to get the best global total score. It was the only agent lender to qualify in all three regions.

State Street

Rated ‘excellent’ by one survey respondent, the lender qualified in the Americas and Asia Pacific regions in the All Lenders part of the survey, in the weighted and unweighted groups, winning in APAC with an unweighted score of 6.75 and a weighted total of 6.25. It also won the average weighted score category, with a figure of 6.58.

In the Americas market, it came third behind J.P. Morgan and RBC Investor & Treasury Services, with an unweighted score of 5.75. In the weighted space, a score of 6.91 placed it second behind J.P. Morgan only.

The situation was similar when only top custodial lenders were considered, with State Street returning to place top in Asia Pacific. When it comes to the agent lenders, it was only one of two firms – alongside J.P. Morgan – to qualify, and also win in the Asia Pacific market.

State Street achieved second or third place when service categories in the unweighted category were taken into account. However, in the weighted space, it won across multiple categories including Collateral Management, Engagement on

Corporate Actions, Income Generated, Lending Programme

Parameter Management, Risk Management, Market Coverage in Emerging and Developed Markets.

RBC Investor & Treasury Services

Canada-based lender RBC Investor & Treasury Services (RBC I&TS) was only one of two lenders to qualify in the EMEA and Americas regions, alongside J.P. Morgan. An unweighted score of 5.36 in EMEA was down on the 2022 figure, while a result of 6.50 for the Americas was higher (6.44 last year).

In the weighted space, it placed at the same levels. It scored a global weighted average of 4.96, down on 2022’s numbers (5.22), and a global total of 9.92, also slightly down on the prior year’s levels.

In the unweighted custodial lenders lists, RBC I&TS also qualified in EMEA and Americas, and took second place in these regions.

Looking specifically at service categories, the Canadian lender won second place in the unweighted Programme Customisation, Provision of Market and Regulatory Updates and Relationship Management lists.

One survey respondent highlighted: ‘RBC I&TS continues to have great reporting tools, risk management and overall client experience.’

AGENT LENDERS (WEIGHTED)

AGENT LENDERS SERVICE CATEGORIES (WEIGHTED)

Global Investor/ISF Beneficial Owners Survey 2023 METHODOLOGY:

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.

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 2023 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.

three 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.

Most improved

The agent lender that improved its score by the greatest margin over its equivalent 2022 score is the most improved firm. Agent lenders are ineligible if they did not qualify for the 2022 survey.

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

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 12 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.

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 number of responses to qualify in each: five in the Americas, four responses in Europe, the Middle East and Africa (Emea) and

• 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, four responses for that category in the Americas and three 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.

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.

The Evolution of the Beneficial Owner

Dimitri Arlando, Head of Data and Analytics Solutions

2022 was a stellar year for Beneficial Owners who participate in Securities Lending. The unique blend of macro-economic factors which defined last year; the War in Ukraine, the resulting energy crisis, high inflation and aggressive rate cuts across the world provided significant market volatility and a fertile market environment for strong revenue growth. $9.89 billion was earned by Beneficial Owners in 2022, 0.7% short of the 2018 record: a post financial crisis figure of $9.96 billion. So, was 2022 a great year for all Beneficial Owners and how do they know if they have performed as well as they should have?

The Securities Lending market has evolved significantly since 2008, driven by increased regulation and a better understanding of risk and reward by the beneficial owner community. What was once thought of as a back-office tool, is now considered complex enough by some Beneficial Owners to move this function into the front office. A few have gone a step further and decided to lend securities themselves rather than outsourcing this to agent lenders. Others are now looking at the broader financing world and thinking about the best and most efficient way to utilise their portfolios taking all of their financing and collateral requirements into account. At the centre of this evolution is technology and data.

Pre-2001, the data available to beneficial owners was limited to each agent lender’s own reporting tool and these varied greatly in terms of what they were able to show. Many reporting tools only showed which securities were out on loan and how much they were earning and up till 2008, few demanded more. Benchmarking and Performance Measurement were in their infancy and underutilised by many market participants. Post 2008, suddenly transparency was on everyone’s mind and would soon become a key consideration when implementing a lending programme.

Although transparency has historically been driven by market participants, industry bodies and regulators are now picking up the baton and leading the charge. The International Securities Lending Association (ISLA) has a Performance Measurement Working Group, Securities Financing Transactions Regulation (SFTR) which came into effect in 2020 and in the U.S, the Securities and Exchange Commission (SEC) is on the cusp of implementing Rule 10c-1, all of which are aimed at increasing transparency in the Securities Lending Market.

Technology has played a big role in helping improve transparency and it will continue to do so going forward. For example, the proposed SEC 10c-1 Rule as it stands today has a reporting window of 15 minutes. Without technological investment, this proposed regulatory requirement will be difficult to achieve. EquiLend has been producing Real-Time data which is published within 5 minutes of trade execution for over a year now meaning compliance with the proposed SEC regulation will be simple for firms in the EquiLend ecosystem.

Today there are more tools and more providers to help measure and benchmark performance than ever before and this number continues to grow however DataLend’s anonymised data modelling and benchmarking captures the largest selection of data, market wide. When

EMEA & APAC, EquiLend.

The Securities Lending market has evolved significantly since 2008, driven by increased regulation and a better understanding of risk and reward by the beneficial owner community.

navigating these options and searching for appropriate partners there are two key components that Beneficial Owners should consider – attribution and relative performance. Performance measurement should always start with attribution, ensuring a good understanding of what’s behind the numbers. Analysis should determine: is it a particular stock, asset class, market or sector or, a combination of these driving revenue? For example, in 2022, the top 5 revenue generating securities were all US Equities - Lucid Group (LCID), followed by GameStop Corporation (GME), Beyond Meat Inc. (BYND), Sirius XM Holdings (SIRI) and lastly, Cassava Sciences Inc. (SAVA). These 5 securities alone generated $769 million for lenders in 2022. Fixed Income assets were also strong contributors to revenue in 2022. US, UK and German Government Bonds and High Yield Corporate Bonds all performed well. Beneficial Owners who didn’t hold these securities in their portfolios are likely to have not had as stellar a year in revenue terms as those that did.

This brings us to the other key component – relative performance. Holding or not holding those securities in your portfolio is down to the investment framework for each Beneficial Owner. Portfolio managers rarely make investment decisions based on securities lending revenue which is why relative performance becomes important. At its simplest, relative performance looks at other institutions who are similar in terms of geographical location, legal construct, Risk Weighted Asset rating and who holds the same securities as you to give you something to compare against where most things are equal – benchmarking against your peers.

For most Beneficial Owners, attribution and relative performance measurement is sufficient and should be the minimum standards in terms of good practice. For others, those who have evolved, measuring performance is becoming more complex. For Beneficial Owners who are now either lending their own assets, either partially in a hybrid structure with an agent or directly on their own, the increasing customisation is making relative performance measurement more difficult. In these instances, Beneficial Owners are looking for additional data points from their data partners to not only measure performance but to also provide actionable insights to

help make lending decisions and deploy their assets most efficiently. Revenue is not necessarily the primary objective.

With the turbulent macro-economic environment set to continue for the rest of 2023 (Q1 revenue came in at $2.7 billion v Q4 2022 $2.2 billion), it’s important that Beneficial Owners who participate in Securities Lending continue to focus on performance measurement to ensure that the governance of their programmes is adhering to best practice. Those that are lending themselves or deploying the assets in their portfolios in a variety of ways should also utilise data and technology solutions, a wide range of which are available through EquiLend, to help make more informed decisions.

Dimitri Arlando is the Head of Data and Analytics Solutions EMEA & APAC, EquiLend. He has over 20 years of experience in securities lending, having started his career with Deutsche Bank in 2001. He has held a number of sales and relationship management roles at some of the largest agent lenders, including State Street, BNY Mellon and Northern Trust. Dimitri holds a Bachelor of Science degree in Banking and Finance from Loughborough University in the UK.

For most Beneficial Owners, attribution and relative performance measurement is sufficient and should be the minimum standards in terms of good practice.

EU Beneficial Owners Roundtable 2023

The 2023 EU Beneficial Owners’ Roundtable was moderated by Andy Dyson, the Chief Executive of ISLA with EquiLend as the lead sponsor. The roundtable was held in late March with a panel of industry experts discussing topics from the data, ESG, collateral and the change from 2022 to 2023.

PARTICIPANTS

Chair: Andy Dyson, Chief Executive Officer, ISLA

Stephen Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA

Olivier Zemb, Head of Equity Finance and Collateral Trading, Caceis Bank

Andrew Geggus, Global Head of Agency Lending, BNP Paribas

Cassie Jones, Managing Director, EMEA Head of Financing Solutions Client Management, State Street

Nick Davis, Executive Director, EMEA Head of Relationship Management, J.P. Morgan

Dimitri Arlando, Head of EquiLend Data and Analytics EMEA & APAC, Equilend

Maurice Leo, Client Solutions, Agency Securities Lending, Deutsche Bank

Ernst Dolce, CEO & Co-Founder, Biben Capital Markets

THE DATA and the change from 2022 to 2023

Dimitri Arlando, Head of EquiLend Data and Analytics

EMEA & APAC: A look back in history shows us that during extreme macro-economic turmoil, the resulting volatility usually means it’s good for security lending in terms of revenue generation, and 2022 has been no different really.

We’ve been collecting data since 2013. We all know that 2008 was a record in terms of revenue generated for the industry. 2022 came in at $9.89 billion revenue generated for security lending participants, slightly shy of DataLend’s 2018 high of $9.96 billion. 2022 revenue was 7% higher than 2021 and 30% higher than 2020.

We had a lot of aggressive rate hikes in 2022. The war in Ukraine, and the resulting energy crisis, high inflation, and more recently, the regional bank issues in the US and Credit Suisse, here in EMEA as well.

Focusing on EMEA, 2022 revenue came in at $2.18 billion broken out as $1.4 billion for equities and $800 million for fixed income. As you can see, the fixed income market performed exceptionally well in 2022 with a 25% increase over 2021.

$700 million of revenue was generated from corporate bonds globally in 2022 and $250 million of that came from EMEA. The driver behind the strong performance was on the balance and the fee side with both increasing significantly in the year.

US equities contributed the most to revenue overall led by electric vehicle companies and meme stocks. EMEA and

APAC didn’t perform as well, and revenue was actually down for both regions compared to 2021.

For EMEA, Equity revenue is dominated by German and French names as you can see, and in Asia, Korean names dominated the top three. However, Korea was actually the fourth best performing market after Taiwan, Japan and Hong Kong. The top four markets in Asia actually accounted for 85% of the revenue.

In lendable terms this number averaged $26 trillion for 2022 but fluctuates between $26 and $30 trillion across the year. Collective Investment Schemes dominate the lendable inventory with 53% of that the total, however, when it comes to on loan, pension funds and government entities have more out on loan, and you’d expect that because collective investment vehicles have very strict guidelines on what they can or can’t do, and that’s not the same for pension plans and government entities.

Andy Dyson, Chief Executive Officer, ISLA: Cassie, when you talk to your clients, is what we see there in the data recognisable in their experience in terms of your programs?

Cassie Jones, Managing Director, EMEA Head of Financing Solutions Client Management, State Street: I think in particular, the fixed income trades are definitely reemerging off the back of the crises that we’ve been seeing in the markets, and it’s worth just spending a few moments on what’s happening in the markets as well.

Of course, this market environment produces volatility, and in turn is generally good for securities lending revenue for the beneficial owners, but you have to also be thinking about the risk that you’re taking in these programs, and of course, your agent lender should be taking care of this on your behalf.

Andy Dyson: Ernst, what are your thoughts on what you see there in terms of market footprint when it comes to performance and where performance is coming from?

Ernst Dolce, CEO & Co-Founder, Biben Capital Markets: What we observed is that the trend in corporate bonds will continue. I remember noticing this trend eighteen months ago, even though corporate bonds are not currently dominating performance; equities still account for 60% of total revenue.

“A look back in history shows us that during extreme macro-economic turmoil, the resulting volatility usually means it’s good for security lending in terms of revenue generation, and

EMEA

Despite the shift in results for securities lending, the market continues to beat records year after year, with only 10% utilisation rate of total lendable assets. The utilisation rate has not increased meaning that the market participants managed to generate more revenue from their assets on loan.

Andrew Geggus, Global Head of Agency Lending, BNP Paribas: I would refer to the fixed income businesses as rockstars and I don’t think that’s ever happened before, but that is definitely a trend that I think we’ve seen for the last 18 months and that we see carrying on as well.

2022 has been no different really.”

Dimitri Arlando, Head of Data and Analytics

& APAC, EquiLend

You need to make sure your clients are comfortable with their risk parameters and the whole point of having strong risk parameters in place is that during times of volatility it’s there to protect you. I do think we will see some clients maybe start to review their risk parameters on the reverse side, so maybe pulling back a little bit – which is not what we want, we want to push so we can optimise revenues.

Andy Dyson: Maurice, where do you see the performance in the markets in terms of what we’re seeing there?

Maurice Leo, Client Solutions, Agency Securities Lending, Deutsche Bank: The headline numbers I agree with in terms of growth overall at an industry level. I think there’s certain clients that have benefited much more and part of that is also the story Dimitri mentioned around concentration, particularly to take US equity revenues in the top 10 names, it’s typically about 50% of total revenues year to date.

Andy Dyson: Is that latitude more to do with the credit they’ll take, the duration their take on the reinvest, what is it that they’re buying that gives them that yield?

Maurice Leo: Yeah, I don’t think it’s always actually buying. I think it can be through reverse repo, which is a different risk construct and one that a lot of them like. The government, sovereign entities that lend, the pension

funds that can lend, can typically do duration, they can do collateral transformation. All the things that UCITS and mutual funds struggle with, because of the regulatory perimeter they have to work within. And that’s for understood reasons but I think that’s why our business is increasingly segmented, and clients are not in a homogenous offering anymore. I think regulation is probably the primary driver but its own their own risk profile [driving performance] as well.

Stephen Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA: One thing I’ll just say on the performance aspects is that, we’ve seen momentum, we’ve seen many of the trends that have already been discussed by Cassie, Andrew, etc and trends in asset classes, but what we’re also seeing is it’s not just about the revenue.

We saw in September last year during the volatility caused by the mini budget action when there was a lot of volatility, and we’ve seen it again now with SVB and with Credit Suisse, etc., that clients are looking to us to help them with liquidity management, not just increase revenue, especially in September last year. Requests such as, “Can you help us transform collateral? Can you help us raise cash? Can you help us deploy cash? So we’re seeing that as a trend. It’s a driver of volume and the entry of some new participants into the program. It’s not just about the revenue.

EUROPEAN BENEFICIAL OWNERS ROUNDTABLE 2023

THE DATA AND THE CHANGE FROM 2022 TO 2023

Regulation and risk mitigation

Andy Dyson: One of the things that I see and I think we’ve got to recognise is that one of the unintended consequences of the regulatory agenda over the last 10 years is how business has flowed into larger names. What are you seeing from a performance and opportunity perspective?

Olivier Zemb, Head of Equity Finance and Collateral Trading, Caceis Bank: I agree with everyone else’s comments but I will be a bit cautious when it comes to US equities. As Maurice said, revenues are highly concentrated on a few names. This could then have a significant impact on programmes’ performances. Other than that, I think it’s going to be a very good year, especially on the govies side.

Regarding credit, 2023 should also be an excellent year for corporate and convertible bonds, probably even better than 2022 which was the best year ever in terms of returns, as commercial property and the retail sector remain sought after. Finally, revenues generated on ETFs should keep on increasing. I think the correlation between stocks, industries and countries is higher now than before.

Nick Davis, Executive Director, EMEA Head of Relationship Management, J.P. Morgan: We have certainly seen a convergence for both the client and trading businesses. The occurring theme is maximising performance, capital, and efficiency which includes, but not limited to, the lending of assets while mobilising collateral.

Mobilisation has been key to help facilitate the financing of both long and short cash trades. Risk taking is also being

reviewed by clients following a shift in some programs out of operations and into a Treasury function.

Clients see additional value in moving away from the traditional indemnified program and approving more non vanilla type trades, esoteric forms of collateral or increasing general utilisation in specific markets. These examples would see additional value being added to their lending program.

Andy Dyson: I think a couple of you mentioned the idea of, is it collateral transformation, or is it the provision of liquidity? Other drivers there were the arrival of margin rules for uncleared derivatives, and as they’ve gone down into the lower waves of those investment management clients. Surprise, surprise, many of those clients don’t have a trading desk to actually manage their own liquidity.

Stephen Kiely: We’re seeing clients starting to put their treasury financing and maybe their securities lending together to realise the efficiencies within their own organisations. I think that’s changing the dynamic somewhat, and we’re seeing clients tweak their programs here and there.

Nick Davis: It’s about managing an efficient book. Should assets be better utilised under a lending transaction or through synthetics?

Andy Dyson: The point you may say is spot on and it is one of the conversations we’re having a lot of is Total Return Swaps. What does that look like? How is that business evolving? It’s always been a part of the broker-to-broker world and it’s always been a feature of certain very large clients. What should we expect to see from a regulatory perspective?

Nick Davis: There are two key regulatory points I would like to raise, US T+1, and 10c-1. Addressing US T+1 first. If you want to be transacting in the US market, you need to be able to support this new timeframe. If clients can offer a pre-notification on sales, you are not going to see any real change to your day to day with this new time frame being implemented.

Fund Managers as we know tend to trade right up to the market close, therefore from an industry best practice perspective, what is a realistic time frame that sales can be accepted by market participants?

The second regulation is 10c-1, and I see two main challenges. First point is the reporting every 15 minutes. The current model certainly doesn’t allow for a 15-minute turnaround.

The second point is around reporting from an inventory perspective. The regulation asks that you report on the total inventory. Will beneficial owners want to disclose their total inventory? In addition, some beneficial owners may want to hold back a certain percentage of their lendable. Therefore, will that disrupt liquidity? Could we see incorrect data being supplied? There are still challenges that need to be addressed.

“Fund Managers as we know tend to trade right up to the market close, therefore from an industry best practice perspective, what is a realistic time frame that sales can be accepted by market participants?”

Nick Davis, Executive

Director,

EMEA Head of Relationship Management, J.P. Morgan

Andy Dyson: I think you’re right that one of the challenges with increasing your settlement rate or reducing your time is that if you’ve got endemic issues embedded in your market, its just going to make things worse, certainly in the short term.

Cassie Jones: I think we’ve all seen that on CSDR. Even the regulators have said the fines are much larger than they expected and they’re not seeing an improvement in the fail rate. Something’s got to give in the markets to be able to improve that. Do they need higher fines, or is it just something that’s an investment in technology and continuing to automate things?

Ernst Dolce: The market should not push for higher fines or encourage the regulator to do so! The penalty is computed as a basis point times a notional, depending on the size of the trade - the fines are already large enough. For some markets, such as credit and emerging markets, increasing the size of the penalty could kill the liquidity. Therefore, we all need to be careful.

Andy Dyson: We had a conversation at the Bank of England somebody said that when you look at going to the insurance market to buy an indemnity, it’s very expensive. So, my comment was, it’s probably the right price and what you’ve been charging for the last 30 years has been the wrong price. I don’t know if anybody agrees.

“Even the regulators have said the fines are much larger than they expected and they’re not seeing an improvement in the fail rate. Something’s got to give in the markets to be able to improve that.”

Cassie Jones, Managing Director, EMEA Head of Financing Solutions Client Management, State Street

Ernst Dolce: Indemnity is very expensive, but the clients are not paying the right price to be honest. Even though the indemnity could be replaced by an insurance, the insurance cost remains high.

Olivier Zemb: About indemnity, I think we need to distinguish two types of trade. On the one hand, GC trades that are too cheap and probably not profitable. If you add the cost of indemnity with a potential CSDR penalty if you don’t deliver on time, you may work at a loss. On the other hand, if you look at specials, you’re on the safe side. The question then is do we need to split the indemnification between the type of trade, type of counterpart and provide indemnity on specific situations, and not on others. It’s a major subject.

Cassie Jones: But also it’s an education point as well with clients. There’s a huge mismatch between the cost of the indemnification and the economic benefit that the client receives.

Stephen Kiely: Olivier made an excellent point. There is no other insurance which is so binary as agent lender indemnity. With agent lender indemnification, it’s really black and white, you’re indemnified or you’re not, every trade, every borrower.

Olivier Zemb: The market is always right. There will always be someone who will be tempted to lower the fees to capture more business and will reduce the levels for the whole business.

Andrew Geggus: It’s been a race to zero for the last 20 years.

Everything tech

Andy Dyson: What we’re seeing in the technology space, what you’d like to see and what we expect to happen next?

Andrew Geggus: I just wanted to have a look back at what we discussed last time around and what has actually happened over the last 12 months, we made some predictions at the time, some have panned out, some haven’t. Firstly, we spoke about distributed ledger technology at length last time around. There is a divergence of views between some people saying it’s more of a pipe dream / longer term, and some people saying there are real use cases shorter term. What we have seen over the last 12 months have been a select number of use cases, I think there has been progress made by HQLAx, as well as JP Morgan’s Onyx business unit – I think they’ve publicly announced different use cases. It’s not going to be rapid in terms of its development, however each use case is a step in the right direction from my point of view and we can probably touch

on the potential benefits of distributed ledger technologies further down the line.

Secondly, we also spoke about AI, this is something I think firms are using much more internally. I think a lot of firms are using robotics and AI in their internal systems but I haven’t seen a sort of “mass-adoption” within the Securities Finance market of a single product.

Lastly, we spoke about standardisation. We spoke quite at length about how to really benefit from technology and all the capabilities it has. We needed much more standardisation across the market, we spoke quite at length about the CDM work, the Common Domain Model that ISLA is doing, and that has actually progressed quite significantly over the last 12 months in conjunction with ISDA and ICMA.

Despite speaking about all these fantastic future technologies, I think in 2023 the key things that we need to address with the help of technology are trade matching and settlement, onboarding, KYC, and operations exception management.

I think with that, one of the key points, for me, is that, luckily, technology providers in our industry are coming up with solutions. I think this is absolutely key – is interoperability.

Ernst Dolce: I think there’s another impact – if the regulator finds that the market participants did not play the game –i.e. they did not increase the “interoperability” – probably, as Cassie mentioned, it will become more expensive. The fintech that are not playing the game of “interoperability”

“Despite speaking about all these fantastic future technologies, I think in 2023 the key things that we need to address with the help of technology are trade matching and settlement, onboarding, KYC, and operations exception management.”

Andrew Geggus, Global Head of Agency Lending, BNP Paribas

“We need to have some kind of harmonisation across the industry but at the same time you need to deliver tailor-made solutions for your clients. We need to provide more and more granular details. There are two things to look at, the big picture and also the clients’ view.”

will disappear because you will have the big firms that will go after that market. Currently, in Europe, I know at some firms that are doing their own platform and looking to emulate Blackrock Aladdin’s model, because they don’t believe that the fintech are taking seriously the lack of interoperability.

Olivier Zemb: I agree with you. We need to have some kind of harmonisation across the industry but at the same time you need to deliver tailor-made solutions for your clients. We need to provide more and more granular details. There are two things to look at, the big picture and also the clients’ view.

Nick Davis: If we go back to the start of the year and what occurred across the financial sector, proves that transparency into a client’s lending program remains a key requirement. Clients want to be able to see their risk profiles, collateral, counterparty exposure and revenue performance. Having that in-house technology is key to meet those requests from your clients.

Dimitri Arlando: Trading desks are now actually saying, show me the settlement rates because that’s important to us. That’s really driven by the search for efficiency. As desks are being squeezed from a fee perspective and everything is becoming more expensive in general, people try and find ways to be more efficient and our data can help you do that.

EUROPEAN BENEFICIAL OWNERS ROUNDTABLE 2023

Olivier Zemb, Head of Equity Finance and Collateral Trading, Caceis Bank

Andy Dyson: For us, ICMA and ISDA, the CDM is a digital standard that they can use to define which fields, which transaction types they want to pull out of your systems on the premise that you’re all describing those trades in the same way. ISLA doesn’t want to be in the process of products and services. What we want is to create that level playing field that gives the regulators the opportunity to pull the information they want, which means from a regulatory perspective, one of their big challenges is they think we need to do something, and it takes them years to figure it out because the process, the consultations, the implementation.

Andrew Geggus: One difficulty for firms within the market is the cost element of it, because resources are limited.

Typically, agent lenders are custodians, custodians don’t have bottomless pots of money to spend on development. When we do have limited resources, we’re also seeing things like SFTR come along, or CSDR. I think when we move through the regulatory roadmap for the year ahead, it’s pretty thick still.

Stephen Kiely: I agree with Andrew’s point that fundamentally as an industry, we need to spend more technology dollars on some of the things that are unseen. Let’s just think about this, BNY Mellon does around 18,000 securities lending trades a day and uses a lot of technology. NGT being some of it. If I go back 10 years, that number will be less than half.

And yet if I go back 10 years, the way we do KYC is the same. The way we onboard clients is the same. The way trades are settled is the same. That needs to catch up and if we’re talking costs, we need to cut down the expenses there.

Andy Dyson: Another factor that I recognise is that you have businesses to run and therefore it’s quite hard to be the person that says: “I’m going to spend a lot of money on sorting out KYC because that’s going to have benefit now and over the next 10 years. But it means that we’re going to make less money this year.” It’s not a good conversation with your boss.

Stephen Kiely: That’s the challenge because people are judged in the short term. Every single person on this table has a short-term annualised budget. What are you going to make? And if you move away from that because you want to invest in the industry, that’s a hard conversation.

Nick Davis: We should also remember how far the industry has come and how robust we are in times of extreme volatility. More clients are taking advantage of APIs, tokenisation will improve the timings when it comes

to settling and returning loans, increased transparency for all market participants, and an ongoing focus on sustainability.

Olivier Zemb: Risk management as well. Ten to fifteen years ago, risk management was less present. Now we have loads of limits in terms of trading and so on. The system is more robust as a whole. We can absorb shocks.

Latest on data

Andy Dyson: We sort of morphed into that world of data. Dimitri is there anything else you would add in terms of how you see the changing role of data in the businesses that these guys run.

Dimitri Arlando: There are two key areas to focus on from a performance measurement perspective. Firstly, attribution. Essentially getting a good understanding of why your

“It’s really important to make sure that you are truly comparing like-for-like, tools like ours allow you to do just that and compare your performance with portfolios that have the same securities as you.”

Dimitri Arlando, Head of Data and Analytics EMEA & APAC, EquiLend

programme is performing better or worse than previously, and really trying to identify if it’s a specific market or a specific security.

The second aspect is relative performance: how are you doing in comparison to your peers and to the industry? Now, that’s the interesting one.

And I think that’s where the evolution is really happening right now, because it was the case and it still is the case for most part, that people look at their performance numbers and they use tools from providers like us that allow them to look at their performance and compare it to a peer group.

It’s really important to make sure that you are truly comparing like-for-like, tools like ours allow you to do just that and compare your performance with portfolios that have the same securities as you. But the problem then becomes when you’re looking at peer groups and you look at sovereign wealth funds, for example, who are very different across the world and have varying levels of appetite for risk, and they have varying investment guidelines as well.

It becomes tricky to benchmark because now you’ve got a whole world of things you can do with that portfolio and a lot of different options. And you don’t necessarily have all the tools to be able to benchmark your performance properly.

A number of beneficial owners are now saying: no, we

EUROPEAN BENEFICIAL OWNERS ROUNDTABLE 2023

“ I think that money is not going to be transitory. Some of its going to stay there because of the interest rate environment.”

Maurice Leo, Client Solutions, Agency Securities Lending, Deutsche Bank

don’t want to see that, we’re more interested in looking at the same data that trading desks use to do their trades. So they’ve moved away from saying, how’s my performance compared to my peers to now saying, am I getting the best out of my assets?

Cassie Jones: I think that granularity and performance is really important because if you can then extrapolate that and understand the drivers of performance moving forward, clients can come back to those opportunistic trades.

Maurice Leo: In a way, beneficial owners have been a catalyst for change particularly around data. The whole ISLA securities lending performance measurement group was borne out of, or championed, very heavily by a beneficial owner in particular, who chaired that group. That’s led to guidance notes that I think will accelerate in adoption this year, which will deliver more consistency, understanding around that data. And I think it’ll make it more valuable and as a result.

Dimitri Arlando: I think it is a really important point. So obviously, we’ve done a lot of work on the performance measurement working group to try and drive those standards. However, we still have some way to go.

Andy Dyson: I think also that what SFTR delivered was a clear understanding of what’s a trade and what’s not a trade, and that rigor has fed through into the way people define things like inputs for performance benchmarking, it’s gone into standards around the CDM. So in that sense, SFTR was a great catalyst for the creation of standards and digital standards.

Olivier Zemb: You need to have some metrics in place. Data providers have done a great job, but I think more granularity is needed for good benchmarking. For liquid assets such as large/mid cap, benchmarking works well and is very easy. For small caps, corporate bonds, not so much…

Nick Davis: I break data down into four points.

• Descriptive and Diagnostic

– This includes the benchmark providers that the industry utilises, with the addition of your prop overlay (performance of your book vs the industry), backward looking and your current footprint.

• Predictive

– This is where diagnostics play an important part in conjunction with quantitative research and AI, to establish your value add and how you can achieve outperformance.

• Prescriptive

– How you achieve the above.

Beneficial Owner Trends – Where next?

Andy Dyson: So how much of a particular asset do we have in a collateral pool? How many days would it take to sell it? What could be that price movement over those days? So, in addition to sort of haircuts, people looking at almost liquidity stress buffers, etc. On collateral, where are you guys seeing in terms of what your clients are asking you more generally?

Stephen Kiely: I think a positive trend in terms of the questions we’re asked by clients is, they are starting to be more concerned with liquidity and credit. And I think that’s absolutely the right way to go. The only true value of whether something is liquid or not, is: is it being bought and sold? And so we’re seeing clients put greater emphasis on the liquidity of their collateral and not too concerned about whether it’s single or double A.

Olivier Zemb: We have to bear in mind that in terms of risk, collateral has to be seen as secondary or derivative. The

“I’ve observed a shift in the buy-side’s approach to pricing collateral, as they are now considering not only risk and diversification, but also the potential uses (reuse) for the assets.”

Ernst Dolce, CEO & Co-Founder, Biben Capital Markets

primary risk is counterparty risk. Collateral is certainly key but you need to check what you are receiving from which counterpart and then you can adapt your collateral profile and haircuts. Right now, haircuts are pretty much standard but this is an area where we need to be flexible.

Ernst Dolce: I’ve observed a shift in the buy-side’s approach to pricing collateral, as they are now considering not only risk and diversification, but also the potential uses for the assets. For instance, some firms are looking to reuse the collateral for intra-group trades. While some firms previously avoided such transactions, they are now recognizing the value of the assets they receive as collateral and seeking to leverage them. Other firms are focused on finding the most cost-effective way to deliver the collateral, which involves comparing the value of different assets, such as government bonds and credit, for various types of transactions like derivatives, repos, securities lending, and collateral. However, implementing

these strategies is challenging and requires building new pricing models.

Cassie Jones: The buy-side need to consider their specific funding and opportunity cost, so that’s where it takes a step up from just general triparty optimisation to asset optimisation. If you can have a view of your entire inventory as the buy-side, and you can actually identify when securities are trading special, for example, you don’t want to tie that up as collateral in a repo trade. You want to lend that on the market. But having just a more real time view of your inventory sources and uses of collateral goes a long way.

Andy Dyson: ESG, does that change the client’s dynamic?

Cassie Jones: We just have to find the balance. There is a cost and benefit trade-off of limiting your collateral schedules so that it reflects your ESG parameters, but then you’ll never get anything out on loan. So there’s that trade off.

Nick Davis: Collateral is secondary. When clients are looking to restrict asset classes due to their own ESG mandate, it is on the lendable and not necessarily on the collateral.

Maurice Leo: A slightly different angle on collateral: HQLA. So if you think the other angle is there is a lot of money moving out of deposits at the moment in Europe because interest rates are rising and in the US because of concerns with bank risk. So you’re seeing that money move. I think that money is not going to be transitory. Some of its going to stay there because of the interest rate environment.

And I think you’ve also got a lot of government agency money parked at the ECB which has been parked there on favourable terms for a long time. And the ECB is anxious that that money gradually and orderly moves off balance sheet, that’s all going to flood into money markets, into repo, into the products that we all operate in.

And arguably a lot of it is conservative and is going to gravitate towards government collateral. So government collateral is likely to become more expensive as you see more of that money coming in. So for those clients that probably ringfence and depend heavily on that, that’s going to be a difficulty. If you’re lending it [government debt], I think potentially you’re going to see enhanced spreads.

Outlook for 2023

Andy Dyson: Can I just get your closing thoughts on what you expect the market to look like as we go into the remainder of this year or any other closing thoughts.

Nick Davis: Continue to support funding requirements for our clients which will enhance asset optimisation, taking

“I’d like ‘23 to be a year where more beneficial owners come to the realisation that securities lending can do more for them than just be a source of revenue.”

Stephen Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA

additional risk through non indemnified style trades, accessibility to other liquidity sources, and continued efficiency both at the front end and operationally.

Olivier Zemb: As a whole, I think we need greater harmonisation together with tailor-made solutions for clients. For trading, govies will be a major element this year, like previous years, but I don’t think we have seen the ‘flight to quality effect’ yet, even if the markets are quite jittery. Repo markets are not moving a lot in terms of spreads between peripheral and core govies.

Maurice Leo: Focus on the [US] debt ceiling, unfortunately, it’s going to be there in the second half of the year. There’s no getting away from that – we have had dress rehearsals before so we’ll deal with that.

Ernst Dolce: I expect an increase in liquidity solutions and a shift in the debate from securities financing/collateral management to liquidity solutions. For instance, in securities lending transactions, we may see more General Collateral (GC) trades with shorter durations, and longerterm evergreen trades, which last for more than one year, may become bullet trades with proper risk management. For unsecured transactions, evergreen trades may also transition to bullet trades, especially if the cost of singlename Credit Default Swaps (CDS) is reasonable for covering specific banking risk exposure.

Dimitri Arlando: I think the use of data and performance will continue to evolve. Transparency will continue to increase and we’ve seen that play out already but the regulations that are coming down the pipe like 10c-1, will push that along even further. From a performance perspective, I think we’re going to have another strong year in revenue terms. I think there’s still a lot of turbulence from a macroeconomic perspective to ensure that there will continue to be opportunities for revenue in the lending markets.

Cassie Jones: On the back of that I think we should put more power in the hands of the buy-side so they can take advantage of the market volatility in those opportunistic trades in partnership with your lender. But one thing I want everyone to keep an eye on as well,is the balance sheet constraints remerging.

Andrew Geggus: Long periods of volatility for this year. I think we saw it recently with banks, but I do think we’ll see more episodes occur. I think this will help drive the fixed income area of securities lending to remain as the rockstar. I do think that we also will see some developments in the interoperability space which is really hopeful for me.

Stephen Kiely: I’d like ‘23 to be a year where more beneficial owners come to the realisation that securities lending can do more for them than just be a source of revenue.

EUROPEAN BENEFICIAL OWNERS ROUNDTABLE 2023

BENEFICIAL OWNER TRENDS – WHERE NEXT? – OUTLOOK FOR 2023

BNY Mellon: Equipped to weather volatility storms

What measures did your organisation take to manage risk during the recent market volatility in the Securities Lending market, and what was the outcome of those measures?

We always try to put ourselves in the place of our clients, understanding their concerns and giving them confidence in the safety of their programme. Collateral is often the focus in times of market volatility; therefore, we directed clients to their collateral adequacy reports and emphasised the daily collateral stress tests that we perform. We regularly re-evaluate the risks and act in the interests of clients and the overall lending programme, and from a relationship perspective, we were proactive in

increasing client communication, which reassured our clients in the market conditions.

The programme did not experience a loss of liquidity for clients as the recall process was very robust. Clients did not restrict highly liquid assets, e.g., government bonds, from lending programmes, to have access to liquidity if required, and borrowers experienced stability of supply as a result. The experience of the UK’s September 2022 Mini-Budget volatility helped all parties to have faith in securities lending programmes.

In terms of outcome, the main period of volatility passed without any serious incident and with the reputation of the programme enhanced.

How has the recent market volatility impacted your organisation’s Securities Lending business?

The effect has been minimal, in that we haven’t seen significant changes to clients’ programme parameters, and simultaneously clients have benefited from the increased revenue that acts as a hedge against volatility. Increased volatility and/ or market events always bring us closer to our clients due to the raised level of client contact, and we believe that results in deeper levels of trust, through pro-active, twoway communication.

How have your clients responded to the recent market volatility in the Securities Lending market, and what

communication,

Steve Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA, shares his thoughts with Global Investor/ISF on market volatility in the securities lending market.

We regularly re-evaluate the risks and act in the interests of clients and the overall lending programme, and from a relationship perspective, we were proactive in increasing client

which reassured our clients in the market conditions.

actions have you taken to reassure them?

Success in this environment depends on preparation beforehand. Market trends come and go with such frequency, that we work to ensure that clients and their programmes are as equipped as they can be to weather unusual conditions and take advantage of opportunities as they present themselves. As already mentioned, volatility often leads to questions from clients and opens opportunities for dialogue and greater education. As a result, clients often gain a greater understanding of the securities lending market when it goes through periods of volatility.

We have seen increased interest from clients in using their securities lending programme, not just as a tool for generating incremental revenue, but as a tool for accessing financing and liquidity management. When volatility and market events squeezed liquidity, clients looked to their lending programmes for answers, and we have developed the apparatus to provide those answers. We can offer solutions to raise cash and deploy cash, as required through our Securities Finance product suite.

Looking ahead, what steps is your organisation taking to prepare for potential future market volatility in the Securities Lending market, and what lessons have been learned from the recent experience?

To continue a theme, we are expanding our efforts to enhance

and align clients’ programmes when markets are calm, in order to lean on this progress during periods of increased volatility. For example, our clients are well educated in how we manage risk and we will increase this to ensure even higher levels of comfort. BNY Mellon has a set of solutions to not only protect and enhance securities lending revenue streams, but to also manage the programme to our clients’ benefit.

For the most part, we have learned two things: clients trust us to manage risk pursuant to their direction; and they are looking for Securities Lending to provide liquidity management tools – not just revenue generation. This changing view of Securities Lending is an industry trend, and it is the responsibility of industry leaders to facilitate these solutions as markets move with greater speed and clients become more sophisticated.

Steve is a securities finance professional with over 20 years’ experience in the securities industry, mostly in securities lending and repo. Steve is the head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA, where he is responsible for sales, market visibility and client management across the whole securities finance suite of products. Before he began working at BNY Mellon, Steve was responsible for securities finance sales and relationship management at Citigroup in London for seven years focusing on Luxembourg, Nordics and the Middle East. Prior to this, Steve was Head of Capital Markets Operations at HVB London, specialising in fixed income and derivative structures. Steve has extensive experience with both the buy and sell side of the market, vendors and industry bodies, and is a regular contributor to industry press and event panels.

When volatility and market events squeezed liquidity, clients looked to their lending programmes for answers, and we have developed the apparatus to provide those answers. We can offer solutions to raise cash and deploy cash, as required through our Securities Finance product suite.

Steve Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA , BNY Mellon

Securities lending in 2023: So far, so (very) good.

CACEIS’ Securities Finance desk takes a look at the current lending market, the hot topics that might drive change, and the opportunities this year for clients looking for extra performance.

Off to a good start: a very positive Q1 for lending revenues

The industry had doubts about how it would top the exceptional year 2022 but we are doing well so far. Total securities lending industry revenues for Q1-2023 are up 24.5% on the same period in 2022, reaching $3.414bn according to S&P Global. This makes Q1-2023 one of the best performing quarters in recent history, with an average lending fee of 53bps - up 39% on the same period in 2022. DataLend confirmed this, revealing a year-onyear worldwide increase across all asset classes of 27%, even with a 5% fall in loan balances.

How do we explain these excellent

figures? Firstly activity on US equity specials continues to heat up, and in the EMEA equities space, Swiss equities have pulled ahead. The only notable decline has been on ETF activity. On the fixed income side, corporate bonds fees are on the rise but with the liquidity that will become less abundant, especially with the end of TLTROs and various ECB programs, we all anticipate a rising demand for HQLA assets as well. The second semester will be very interesting indeed.

What are the industry hot topics in 2023

Regulation is the first topic for the lending industry. The main focus now being on the incoming Basel CRR3 and CRD6 putting pressure on balance sheets, which shall push for more client selectivity from agent lenders based on capital requirements and RWA consumption. Regarding CSDR’s settlement disciple regime, we observed that it is now well established but questions around a mandatory buy-in process scheduled for 2025 remain, although it seems SFTs will be exempt. Another theme is coming from the level 1 review of UCITS and AIFMD which might constrain buy side players acting as agent lender for their own funds to justify on the split of the revenues they take.

A second key topic is indemnification, as it is still a dilemma for agent lenders that haven’t yet stepped up to solve it. Indeed, these clauses are somehow still offered to

clients despite the high cost of it. That is why, for instance, some agents now favour special transactions, stating indemnified GC transactions lack profitability, but clients are not ready to give up this clause and agents are struggling to stop providing it, aware of the fierce competition.

The third topic we can identify is obviously the challenges of technology. Similar to any industry, we need more data and granularity to answer clients’ and market players’ needs. For example, we need finetuning benchmark data especially for less liquid small capitalisation or corporate bond type assets to ensure clients have benchmarks aligning with best execution standards. Another example would be on the

2022 was an exceptional year for revenues and the trend continues into 2023. There remains a great deal of uncertainty which makes forecasting more challenging, but active markets nevertheless mean favourable lending opportunities for our clients.

Julien Berge, Head of Fixed Income and Repo

Innovating and keeping pace with changing financial markets is essential in combination with streamlined processes that meet regulatory constraints but leave a degree of flexibility for individualised customisation.

Olivier Zemb, Head of Equity Finance and Collateral Management

Let Securities Lending take you...

Make idle assets work harder with Securities Lending. Behind the scenes, we generate low-risk additional revenues on your securities. The only impact on your business is enhanced performance figures, and today, every basis point counts.

We offer tailor-made agency, principal and lending solutions with remote access to suit your precise needs.

CACEIS, your comprehensive asset servicing partner.

Contact: seclending@caceis.com

dynamic collateral selection required by ESG-oriented clients, which is heavily dependent on IT and costly data like ESG indexes. Automating AGM data collection and management to ensure timely securities recalls is also major a challenge that only technology will help address.

Why securities lending is still a great opportunity for beneficial owners in 2023

Three main themes are emerging for beneficial owners this year: ESG, cash reinvestment and collateral pledge.

Regarding ESG, regulators had been clear about the important role securities lending plays in financial market efficiency. So, the consensus we are seeing amongst ESG/SRI lenders that lending can be compatible with their portfolio strategy is very important. The difficulty comes from the variations in the approach. To resolve this, the International Securities Lending Association (ISLA) has drafted a set of good practices for ESG matters which establish a comprehensive framework for action. This will certainly help beneficial owners fine tune their lending programme.

Regarding cash reinvestment, the positive interest rate environment has changed the perception of the asset owners on the possibility of reinvesting the cash received as collateral. Nevertheless, the investment supports remain an essential choice for the client. It must be sufficiently secure not to increase portfolio risk, that is why so far, most reinvestment is currently performed via money market funds.

The third theme concerns pledge structures which can allow agent lenders to maintain an aggressive profit split or even offer a better one.

Data providers note that pledge (as opposed to transfer title) structured transactions doubled last year so there is clearly a trend here and clients willing to accept this type of collateral have an excellent opportunity to

enhance the profitability of their lending programme.

Donia Rouigueb - Head of Sales Securities Finance and Repo: “Regulation-driven transparency and ESG-focused best practices is good news for lenders as it gives them confidence to lend their securities, they are enhancing the value for their investors and playing a key role in maintaining market liquidity.”

Securities lending is safer than ever and remains a legitimate source of additional revenues for beneficial owners into 2023, and as long as the constraints service providers face are not too restrictive, clients and their end-investors will continue enjoy the performance enhancement possibilities in this promising market.

Donia Rouigueb, Head of Sales Securities Finance and Repo

CACEIS is an asset servicing banking group dedicated to institutional and corporate clients and one of the world’s market leaders in asset servicing. CACEIS’ Securities Finance desk designs bespoke securities lending, borrowing, liquidity and collateral management services for its clients, leveraging its group’s core asset servicing activity as well as a broad regulatory expertise to meet its clients’ specific risk/return requirements.

Julien Berge and Olivier Zemb both joined CACEIS in 2019 respectively as Head of Fixed income & repo in Luxembourg and Head of Equity Finance & Collateral Trading in Luxembourg.

Donia Rouigueb joined CACEIS in 2015 and is currently Head of Sales for Securities Finance and Repo services, developing tailormade products for institutional, asset manager and corporate clients of the custodian franchise.

Regulationdriven transparency and ESG-focused best practices is good news for lenders as it gives them confidence to lend their securities, they are enhancing the value for their investors and playing a key role in maintaining market liquidity.

Julien Berge, Head of Fixed Income and Repo Olivier Zemb, Head of Equity Finance and Collateral Management

Donia Rouigueb, Head of Sales Securities Finance and Repo

US Beneficial Owners Roundtable 2023

During March 2023, Global Investor/ISF held the annual US Beneficial Owners’ Roundtable in New York with the help of EquiLend as the lead sponsor. The roundtable was moderated by Global Investor’s Managing Director Amelie LabbeThomson who was joined by an esteemed group of speakers to discuss recent trends, developments and challenges in the securities finance space.

PARTICIPANTS

Chair: Amélie Labbé, Managing director, News & Insight, Global Investor Group

Brooke Gillman, Global Head of Client Relationship Management, eSeclending

John Templeton, Global Head of Sales and Relationship Management for Securities Finance, BNY Mellon

Amy A. Dunn, Executive Director, Americas Head of Relationship Management, J.P. Morgan

Mike Saunders, Head of Agency Lending, Americas, BNP Paribas

Nancy Allen, Head of Data and Analytics Solutions, EquiLend

Francesco Squillacioti, Senior Managing Director, Global Head of Client Management, State Street

Cherie Jefferies, Director of Fixed Income Trading, State Board of Administration of Florida

Michael Stamm, Director of Financing & Collateral Management, State of Wisconsin Investment Board

Current Market Drivers and Trends

Amélie Labbé: The global securities finance industry has generated an increasing amount of revenue for lenders since 2020, with the Americas region specifically spearheading that growth in multiple areas. We are gathered here to analyse the situation and see how recent events and potential future developments will impact this situation, which brings me to my first point today looking at current market drivers and challenges.

I would like to hand over to Nancy Allen from EquiLend to take us through some key metrics to set the scene for our discussion today.

Nancy Allen, Head of Data and Analytics Solutions, EquiLend: I have a high-level overview here to set the scene for our discussion today. Looking at revenue in 2022, we were up 7% over 2021, with lender to broker revenue of about $9.9 billion.

When you look at that 7% increase, global equities increased by 2%. Overall, global fixed income was up 25% and we’ll talk a little bit about the drivers behind that significant increase in fixed income. Looking regionally, the Americas was up 10%. Equities were up 7% in the Americas and fixed income up 19%. In EMEA, we were

up 6% with equities and fixed income up 22%. In Asia, primarily dominated by equities, we were down 2%.

Jumping into a couple of highlights into some drivers of revenue. We had seven interest rate hikes in 2022 worth 425bps; that’s the highest since 2005, where we had eight interest rates. The rate hikes were key drivers behind the increase in revenue for fixed income.

What we have here is the revenue by quarter and overlaying the revenue we have the average basis points. You can definitely see an increase in the average fee going from Q1 of 2020 - of 31 basis points - up to a high of 39 in Q3. So far in Q1 2023, we’re coming in at about $2.2 billion and that’s up until March 17th.

Amy Dunn, Executive Director, Americas Head of Relationship Management, J.P. Morgan: In terms of borrower behaviour, counterparties have become acutely focused on RWA and actively targeting RWA friendly client types which are associated with the lowest capital requirements. This has led to providers smart bucketing whereby client types are grouped by their risk weighting which will dictate trade flow. For example, sovereigns and central banks are associated with the lowest RWA and highest demand whereas pensions, insurance companies and ‘40 Act Funds are associated with the highest RWA and lowest demand. This will clearly have an impact on performance based on what bucket a lender falls into.

Francesco Squillacioti, Senior Managing Director, Global Head of Client Management, State Street: I think [Amy] hit it right on the head and that’s certainly a concern for our counterparties as well as for agent lenders looking at RWA usage: trying to make sure that we’re getting out the most efficient high value trades that we can. Certainly, looking at the different types of clients in the program, we’re seeing those sorts of patterns turn out in terms of sovereign wealth funds, etc., at a zero riskweighting, looking a bit more attractive than a 40-Act. So, that’s certainly a consideration where you are having discussions with clients – making them aware of RWA impact, both from where we sit as agent lender, as well as where from where our counterparties sit, and showing what those impacts are.

“We had seven interest rate hikes in 2022 worth 425bps; that’s the highest since 2005, where we had eight interest rates. The rate hikes were key drivers behind the increase in revenue for fixed income.”

Nancy Allen, Head of Data and Analytics Solutions, EquiLend

As Nancy points out, it was still a pretty good year. I think our performance echoed a lot of what she presented earlier. The other part is that lender participation has grown, as well. When we think about going forward and bringing new clients onto the program, we’re just trying to make sure that the types of assets that we’re bringing on are as accretive as they can be to the program as we look at what clients are looking to enrol.

Amélie Labbé: Amy, I’m just going to ask you to share what your thoughts are on what the drivers are going to be

that will impact lender and borrower behaviour in the near future, but also if you can give a bit of a flavour as well on types of collateral that we’re going to be looking at as well.

Amy Dunn: On the back of Francesco’s point, I would agree that client interaction is key. As it relates to the impact of RWA or any headwind facing our industry, in order to remain relevant and competitive, strong consideration of program changes that allow for greater flexibility will be beneficial. We have a limited number of levers at our disposal but the more levers approved, the better positioned a lender is to capture the next revenue opportunity. Common considerations are: collateral flexibility, counterparty or market expansion, conducting a cost/benefit analysis ahead of recalling for proxy, increased participation in trade opportunities and review of cash collateral guidelines.

Cherie Jefferies, Director of Fixed Income Trading, State Board of Administration of Florida: When it comes to borrowers, we depend on our securities lenders to evaluate the borrowers that we use. When we look at the alternative for different collateral between the regulation and the tax harmonisation that’s transpired over the past several years, for us, that’s always evolving. We’re always looking at different types of collateral. Currently we’re looking at adding some non-cash

“I think there will always be a need for the traditional securities lending model, but as we contend with a smaller universe of specials, rising interest rates, market volatility, evolving UMR and seg IM rules, lenders are faced with new challenges that require different solutions.”

Amy A. Dunn, Executive Director, Americas, Head of Relationship Management, J.P. Morgan

CURRENT MARKET DRIVERS AND TRENDS

US BENEFICIAL OWNERS ROUNDTABLE 2023

CURRENT MARKET DRIVERS AND TRENDS

collateral availability to our program. We’re in the process of doing that now, so that has not been finalised, but we always are looking to keep our program abreast of the changing regulations and environment.

Brooke Gillman, Global Head of Client Relationship Management, eSeclending: I think when you talk about flexibility around guidelines, what is starting to transpire now in the industry is not just the things that Cherie and Amy and Cesco were speaking about in terms of collateral types and different sort of transaction components to what the economics are of the trade but it’s also about structural flexibility. I think that will be an ongoing theme and so there are a lot of new ways that people are approaching what are the same types of and results in terms of exposure on transactions but done through either a different legal structure or a different mechanism. We have spent time as agent around this table educating the client beneficial owner community on what they can be comfortable with on collateral and things like that.

The next five, ten years will be much more around structural differences of trade types. So whether that may be pledge models or similar models in that sense, central counterparties, agency prime on indemnified programs, there are lots of new structural differences I think that will

“The next five, ten years will be much more around structural differences of trade types. So whether that may be pledge models or similar models in that sense, central counterparties, agency prime on indemnified programs, there are lots of new structural differences I think that will come into play across the marketplace in order to keep up with the needs that are being driven by these regulatory capital constraints.”

Brooke Gillman, Global Head of Client Relationship Management, eSeclending

come into play across the marketplace in order to keep up with the needs that are being driven by these regulatory capital constraints.

Amy Dunn: I would agree. There is an increased focus on identifying ways to leverage the existing pipes and infrastructure in alternative ways. I think there will always be a need for the traditional securities lending model, but as we contend with a smaller universe of specials, rising interest rates, market volatility, evolving UMR and seg IM rules, lenders are faced with new challenges that require different solutions. The industry is beginning to view collateral management, securities lending / financing and liquidity more holistically.

For example, lenders that employ leverage or derivative strategies may be facing new requirements that have forced organizations to think more broadly about how they approach collateral and manage liquidity. Those lenders are not only thinking about these products individually but also how they can be interconnected to optimize overall returns.

Some clients are also exploring alternative ways of utilizing cash collateral. We have worked with certain clients to focus on optimisation and consider opportunities such as leveraging cash collateral raised through a securities lending transaction to finance their needs in a more cost effective way.

The US regulatory agenda

Amélie Labbé: One topic that some of you touched on is the US regulatory agenda. So can I just turn to John and Amy to give us a very few high-level comments on some of the main regulatory things to look at and that you believe will impact the market or impacting the market currently.

Amy Dunn: The top three regulations that the industry is focused on would be: T+1, which is going to have a significant impact across the US, 10c-1, commonly referred to as US SFTR and Form N-PX which is focused on enhancing the reporting of proxy votes by 40 Act Funds.

John Templeton, Global Head of Sales and Relationship Management for Securities Finance, BNY Mellon: Yes, I would definitely agree on those all being the top three. The other ones that we’re focused on are central clearing of U.S. treasuries, the changes to the U.S. capital rules (moving off of standardised RWA and into either revised comprehensive or advanced RWA metrics) and the bilateral repo transparency rules, which is going to require a number of our beneficial owners to start to report those transactions.

“The other ones that we’re focused on are central clearing of U.S. treasuries, the changes to the U.S. capital rules (moving off of standardised RWA and into either revised comprehensive or advanced RWA metrics) and the bilateral repo transparency rules, which is going to require a number of our beneficial owners to start to report those transactions.”

John Templeton, Global Head of Sales and Relationship Management for Securities Finance, BNY Mellon

Measuring and tracking costs, risks and performance

Amélie Labbé: One of the big topics that we kind of bring up every roundtable is, measuring, tracking, cost risk performance. My first question for you is what tools do you think are working in the current environment? What data do you look at? Is it of interest to you to measure this performance effectively, but also to keep an eye on competition.

Brooke Gillman: As a lender, you need to know your comparative data set and make sure that it is the right comparative. We are a bit different than the custodial banks or a more traditional agents in that we don’t run a pooled program, so every client truly has a different program, and this makes it even more challenging to identify the appropriate peer comparison set.

Today, more clients are using securities lending for different reasons. Many are no longer lending for the sake of lending only. The point is that every program is uniquely different, and you need to appreciate that and apply it when you’re looking at the comparative data sets. Otherwise, it’s going to be confusing and will lead to the wrong conclusions about performance.

Lenders need to understand why their program may differ from others and know how to assess their own

performance. Understanding why you look a particular way within your peer universe is key and knowing what levers can be applied to make a change to performance is important.

The other thing I would say we’re seeing is the level of beneficial owner engagement on data is very different today than it was many years ago. If you roll the clock back 25 years in this industry, there was no data available. That has changed dramatically and now there’s very good data from several different sources. It’s daily information. You can have data overload quite easily, but how do you use data in an efficient way to make different decisions is what is important.

Mike Stamm, Director of Financing & Collateral Management, State of Wisconsin Investment Board: Brooke, I think you highlight a struggle we certainly have, which is, finding good apples to apples comparisons. We certainly have peer beneficial owners who likely have similar books to us, but they may not view collateral schedules the same, or may not use cash collateral the same way, so their economics become very different. One thing we try to do through data is to understand the important positions in our book, where do we have an opportunity to really earn some revenue? We focus on that stuff on a ticker level, and beyond that, it is as you have mentioned, we try to find novel ways to utilise that more

US BENEFICIAL OWNERS ROUNDTABLE 2023

TRACKING COSTS, RISKS AND PERFORMANCE

commoditised part of our book in a way that can help us differentiate our pool of GC from other similar pools.

John Templeton: I think it’s also where the regulations start to align with the data as well. If you think about T+1 settlement coming in and the advent of potentially increasing fails, being able to see what drove fails is going to end up being very helpful.

A key for our clients will be how quickly they’re able to provide their sales/recalls to their agent to be able to make sure that their assets are being returned to their custodial account as quickly as possible.

We also see a lot of demand from clients. It’s not just whether the data is available, it’s how data is available and how to make it easier for them to be able consume it into their systems.

That flexibility to be able to set up reports in multiple different ways, whether it’s a report, or it’s a data extract, or an API that’s going system to system to a client. There are a number of clients who are looking for that type of data to be able to analyse it faster than they did before.

Evaluating the impact of tech

Amélie Labbé: Looking specifically at how and where innovation is coming from, where it’s going as well and where you see investment going into, in terms of tech

“We need to get the best assets out at the best rate that we can, the most efficient way possible and we can’t do it really without reliance on data and analytics.”

Francesco Squillacioti, Senior Managing Director, Global Head of Client Management, State Street

and any sort of comments you have around that. Michael Saunders - I know that you actually have some very interesting thoughts that you shared last year on this topic, so I’m keen to hear some key issues this year as well.

Mike Saunders, Head of Agency Lending, Americas, BNP Paribas: Securities finance is a maturing business. While the lender base has grown, the number of participants has grown, but the number of personnel has shrunk. For the most part, that’s through the efficiency of technology.

Aside from analytics there are vendors out there that will help you with onboarding, with liquidity discovery, with proxy identification, with collateral management, with efficient use of capital and collateral optimisation not to mention ESG analytics. And the list goes on.

US BENEFICIAL OWNERS ROUNDTABLE 2023 EVALUATING THE IMPACT OF TECH

Most of the information that we’re developing internally is really just pulling all of our vendor services together to make it operationally easy whether it’s a trading or risk management perspective, client web reporting, all of that, just to make that run more efficiently.

I think a lot of the technology in the fintechs that are out there allows you to do that. So, I only see that becoming a greater and greater portion of our overall business and activity.

Francesco Squillacioti: To the point made about efficiency, that’s really the name of the game. We need to get the best assets out at the best rate that we can, the most efficient way possible and we can’t do it really without reliance on data and analytics.

We’ve also got a team that – our Algorithmic Trading group - is dedicated to pricing, and they’re constantly looking at pricing across the market, across what we’re doing, looking at trends within our own book and just making sure that we’re trying to capture any possible move that we can in pricing and then on the client side. So, certainly, a lot of time and investment is spent in that type of technology for us.

Cherie Jefferies: We have a data provider that we use and we have worked with them in our sec lenders or with the information on the provider with our sec lenders to get certain securities out or look how a security is going to be loaned out before we purchase.

We don’t do it too often but we have done that in the past and when it comes to the data that was provided by our sec lenders, what we found several years ago is, we had different departments pulling different data from our sec lenders and we have created a program that accumulates all this data so everyone has access to the same information and everyone’s pulling the same information, so the beneficial owner, we’re all looking at the same ratios, we’re all looking at the same levels, revenues. We’re

all making the same decisions off the same information, so we’ve been working on that for several years and almost completed and so we’re excited about that.

Nancy Allen: On the technology front, as a fintech, we continue to focus on connectivity and bringing efficiencies to the market.

On the innovation front, I would highlight a big initiative that we’re working on, which is called OneSource, which is designed to be a single source of truth in the securities lending market for lifecycle events and the aim there is to eliminate reconciliation issues. It will be a game changer. We do have a number of the organisations who have already committed to working with us on developing OneSource. A lot of the issues in lending happened after you put that trade on and OneSource will help address those issues and streamline it to be more efficient for everybody, including the beneficial owners.

Portfolio management, where next?

Amélie Labbé: Brooke, I’m keen to get your thoughts on where demand is coming from for the beneficial owners and how it’s impacting liquidity and if you could maybe give us some comments as well on revenue opportunities that potentially exist as well for beneficial owners when it comes to alternative forms of collateral, for example?

Brooke Gillman: I think that the biggest trend is the approach that beneficial owners are taking globally is very different than it was a few years ago. Beneficial owners are looking at it more as one of their investment tools.

Depending upon what their goals are they’ll use security lending or repo differently. We still see traditional securities lending programs and activities, but we’re also starting to see securities finance used more as a broad financing tool. Asset owners are looking at securities financing from a big picture perspective. We are seeing a lot of collateral transactions and a lot of collateral funding trades.

It’s all about using securities finance as a tool in the portfolio management decision making process. As more asset owners adopt this approach, we will continue to see growth in our industry. They will also continue to evolve how they look at their programs and therefore providers will adapt and offer new solutions and services in order to try to keep up.

Michael Stamm, Director of Financing & Collateral Management, State of Wisconsin Investment Board

Mike Stamm: Brooke you made a point about a holistic view of sec finance, and that is something we think about a lot. What is the best fit for our assets to meet our needs for liquidity, revenue, collateral, and safety. And that fit may include swap, futures, repo, and sec lending. What we look for is opportunities to reduce bad carry trades, if we

“What we look for is opportunities to reduce bad carry trades, if we are borrowing cash to reinvest in a lower yielding finance structure, we should examine that. And it can be more difficult than you expect to identify those implicit carry trades. I find it a very interesting puzzle to fit together.”

are borrowing cash to reinvest in a lower yielding finance structure, we should examine that. And it can be more difficult than you expect to identify those implicit carry trades. I find it a very interesting puzzle to fit together.

Amy Dunn: To Brooke’s point around broadening the conversations to include more than just traditional securities lending, the ability for an organization to provide this suite of services under one umbrella will be a differentiating factor when selecting a provider especially as the industry continues to evolve.

Mike Saunders: So it’s this concept, at least the one we see, of the securities lending activity becoming central to the funding needs throughout an organisation. Securities lending is one tool for liquidity management, the kind of cheapest form of collateral. We see this as part of the reason for the increased utilisation of corporate bonds in the market. Yes, of course, a lot of that is interest rate driven but I can tell you that a fair amount of beneficial owners have been in the market lending their portfolios just to raise cash that they’re using for other purposes. So, it’s this whole concept and I think, Brooke, you touched on it before, that securities lending cash is cheaper than credit facilities, revolvers and things of that nature. The general premise is, I see these walls breaking down and securities lending is now securities finance.

“The general premise is, I see these walls breaking down and securities lending is now securities finance.”

Mike Saunders, Head of Agency Lending, Americas, BNP Paribas

PORTFOLIO MANAGEMENT, WHERE NEXT?

US BENEFICIAL OWNERS ROUNDTABLE 2023 PORTFOLIO MANAGEMENT, WHERE NEXT?

S&P Global: Control, Monitor, Understand

2022 was a year marked by market volatility, geopolitical risk, investor uncertainty, and a sharp decline in asset valuations. The securities finance markets offered a counterbalance to the fall in investment returns over the course of the year, as 2022 generated the second highest securities lending revenues since 2008. During the year, the securities finance market generated revenues of over $12.5B (see Fig 1), with over $10B going directly to lenders. This increase of 9% YoY reflects favorable market conditions for securities lending (volatility often provides multiple opportunities for market participants) and a beneficial owner community that has become more engaged and more informed than ever before.

As market valuations and the use of passive investment strategies have increased over recent years, so has the number of market participants engaging in securities

US

lending. After hitting an all-time high of $37 Trillion in 2021, the value of lendable inventories fell throughout 2022 to a low of $29T at the end of December, while the average value of available assets over the year was $31T. As we looked at the client breakdown (see Fig. 2), asset managers were the largest contingent of the lender base owning just over 57% of the total lendable assets available in the market (equating to just over $18B). Pensions funds were the second largest contingent, with just over 19% of all assets, followed by Sovereign Wealth funds (11%) and insurance vehicles (5%).

Despite having a smaller lendable inventory, our data shows that pension funds, as seen in Fig. 3, had the greatest proportion of their assets on loan over the year, 36% ($850.2M) in 2022, falling from 37.2% ($892.6M) in 2021, followed by asset managers, 24.53% ($578.9M)

Monica Damas-Shaw, Head of the

Beneficial Owner Product, S&P Global Market Intelligence.

Fig 1. Annual Securities Finance Revenues © S&P Global Market Intelligence

Analyze. Understand. Monitor.

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https://www.spglobal.com/securitiesfinance

compared to 24.13% ($578.8M) in 2021 and Sovereign Wealth funds, 24.45% ($577M) in 2022 vs 22.87% ($548.7M) in 2021. Insurance vehicles contributed just over 5% ($132.7M) of all on loan balances. Average on loan balances were $2.36T over 2022, a slight reduction from $2.39T over 2021.

Throughout 2022, revenues increased across the lending community, which was positive for investment portfolios. Asset managers received the largest share of the lender revenues over 2022 ($4.2B vs $3.4B in 2021), even though they had less on loan than pension funds which generated ($2.69B vs $2.42B) and sovereign wealth funds ($1.5B vs $1.1B in 2021). Insurance vehicles generated $450m in revenues over the year ($436.4M in 2021), as seen in fig. 4.

Over the years, securities finance has become an integral part of the investment management process. Risk management has become an increasingly important consideration for all beneficial owners as they seek to protect both their revenues and investors in a new era of higher interest rates, increased volatility, and greater uncertainty. As the industry has changed, the increase in

engagement across the beneficial owner community has been initiated by a fervent desire to better understand the tools and processes required to optimize performance, oversee compliance, manage risk, and minimize opportunity costs.

At S&P Global Market Intelligence Securities Finance (SF), our current focus is the introduction of solutionsbased capabilities where we combine data and analytics to provide transparency and tools, so that clients have a better understanding of how their programs are being run. We have done this by focusing on three separate pillars we believe are essential to the oversight and management of any securities finance activity: control, monitor and understand.

Control

Many beneficial owners lend through their custodian or a third-party agent. When lending through an agent lender, any direct control that an owner has over their assets is transferred to the lending agent. Therefore, it is particularly important that a robust framework is in place that dictates the terms and conditions in which an

Fig 2. 2022 Average Lendable: $31.6 Tn © S&P Global Market Intelligence

Fig 3. 2022 Average Loans: $2.36 Tn © S&P Global Market Intelligence

Over the years, securities finance has become an integral part of the investment management process. Risk management has become an increasingly important consideration for all beneficial owners as they seek to protect both their revenues and investors in a new era of higher interest rates, increased volatility, and greater uncertainty.

agent lender can engage when lending a security. Many of the program parameters are negotiated through the Securities Lending Agreement (SLA) with the lending agent, these should be reviewed regularly to ensure that any new market initiatives or workflows are being captured. Regular reporting should be required to ensure that the agreed conditions are followed. It is also advisable that these conditions are captured by an internal securities lending policy to ensure that all internal stakeholders are aware of the lending structure. As seen throughout the past year, effective and timely reporting remains essential in managing and identifying potential risks.

Monitor

Active monitoring of the securities lending activity is essential to ensure that risks are managed, and revenues are optimized. The monitoring function for a beneficial

owner can be split into three different areas: Exposure, Exception Management, and Liquidity Management. Managing exposures should occur across lending agents at the counterparty legal entity level and collateral holdings level (credit ratings, maturity buckets, liquidity profiles). Overseeing this requirement across different lending vehicles and agents can sometimes be both complex and cumbersome. As part of our offering, we provide access to consolidated reporting and a portal to give asset owners a wholistic view of their programs.

Exception management lies at the heart of any oversight function. A clear and timely process to identify exceptions is critical for effective risk management and program governance. These checks should be made daily to ensure that any potential exceptions can be addressed promptly and that the program is not assuming additional and unauthorized

Exception management lies at the heart of any oversight function. A clear and timely process to identify exceptions is critical for effective risk management and program governance. These checks should be made daily to ensure that any potential exceptions can be addressed promptly and that the program is not assuming additional and unauthorized risk.

Fig 4. 2022 Revenue

© S&P Global Market Intelligence

risk. With an increase in both the quantity and type of regulations affecting securities lending, having an appropriate and effective exception management process allows asset owners to both recall and efficiently restrict assets, and to be aware of any opportunity costs that may exist as a result. To address the need for beneficial owners to independently monitor adherence to agreed lending parameters, we launched a Compliance Check portal for beneficial owners. The portal provides an exception-based tool to identify potential breaches of lending parameters at the transaction, instrument, market, and counterpart level.

Equally important to any lending program is understanding the liquidity profile of their loan positions. We also provide liquidity data to assist with the efficient management of lending limits and identifying any potential market liquidity squeezes.

Understand

All beneficial owners should have a deep understanding of the activity taking place across their asset pools and understand how this can be either expanded or contracted if their risk profile is adjusted. A securities lending program’s earnings potential is often linked to its appetite for risk and therefore, appropriate benchmarking is considered the best practice. As was seen during 2022, the “specials” market (stocks being lent at a fee greater than 500bps) has become an important driver of revenues for many asset owners. Having a clear understanding of these rates, the liquidity risks associated with lending these positions and the potential revenues should any of the metrics be adjusted, remains critical to optimizing a lending program. We offer extensive reporting and access to relevant data for proper oversight management.

S&P Global Market Intelligence has developed several tools that are specific to beneficial owners to assist them in meeting the challenges listed above. These tools are proving popular across the beneficial owner community as volatility remains a key feature across all markets.

Looking towards the spring and summer months, we believe that securities lending revenues will remain robust. We also believe that the first half of 2023 has the potential to produce strong returns for beneficial owners. To ensure that a lending program is participating in these returns in a risk-adjusted manner we encourage all beneficial owners to consider many of the controls that have been mentioned. As our engagement with beneficial owners continues to grow, we believe that S&P Global Market Intelligence is well placed to independently assist and advise the beneficial owner community on the best way of achieving their securities lending goals.

Monica Damas-Shaw, Director, Head of the US Beneficial Owner Product and US Team Lead for Securities Finance. Her role focuses on the development and expansion of the beneficial owner offering, as well as the management of beneficial owner relationships in the Americas. Monica joined S&P Global (formerly IHS Markit) in April 2019. Prior to S&P Global, she worked at JP Morgan and Credit Suisse as a Securities Lending client relationship manager. In both roles, she was responsible for managing and assisting large institutional clients with their securities lending programs. Monica holds a B.B.A in Finance from Hofstra University.

Looking towards the spring and summer months, we believe that securities lending revenues will remain robust. We also believe that the first half of 2023 has the potential to produce strong returns for beneficial owners.

Borrower Onboarding and Client Attractiveness

INTERVIEW WITH HEAD OF AMERICAS ASL – VIKAS NIGAM

How do you approach borrower onboarding and what factors do you consider when evaluating the attractiveness of potential clients as borrowers?

As a program, we are selective of our counterparty base. Adding a new counterparty should add value to the program; whether by adding competition for supply, providing balance-sheet or offering collateral for cash reinvestment trades. Additionally, we also consider regulatory netting as a key factor and crucially, as a program, we should be able to justify the name should a client ask why they should be approved.

How do you assess creditworthiness, risk profile, and suitability of prospective borrowers, and manage associated risks during onboarding?

With Deutsche Bank’s compelling dual indemnification, the bank has a vested interest in ensuring the safety and soundness of any counterparties added to the program. As such, our credit and risk teams are the first port of call for any new approvals. The bank employs a cadre of credit /research analysts, whose primary role is following the financial sector. These analysts create a feedback loop into our bank-wide risk systems which monitor exposure to individual entities and the broader sector, across the bank.

Depending upon the capital of the institution being added, we will be given a credit line, which is monitored daily, against the securities we lend and take back as collateral. As credit lines are utilized, we can either request a higher limit, alter the composition of transactions to reduce the volatility in the basket of securities, or we can increase margins, so as to reduce the impact of the value at risk (VAR) volatility on the credit line.

How do you attract and retain high-quality borrowers in a competitive market, and differentiate your offerings to make your organization appealing to potential clients?

Recognizing that borrowers have a choice of where to do business is just as crucial as recognizing our clients have a choice of lending agents. Just as we spend a significant amount of time and resources to get to know and understand our clients, we spend just as much time learning about our counterparties, their business needs and understanding their funding and capital requirements in light of regulatory metrics such as NSFR, LCR, and RWA.

Being able to talk about them and promote trades/clients beneficial for all parties, is a fast-track way of staying relevant and becoming a preferred partner.

How do you identify and manage risks associated with potential clients with challenging credit or risk profiles while balancing business objectives?

Being a third-party lending agent, we have the ability to be just as selective of our client base as we are with our borrower base. Having more supply is usually a good thing but not all supply is created equally. Assets could be widely held blue chip names. Guidelines could be restrictive. The client could even be from a non-nettable jurisdiction. Being familiar with the way counterparties work, allows us to be able to work in concert with our

Vikas Nigam, Director, Head of Agency Lending in the Americas, Deutsche Bank

Recognizing that borrowers have a choice of where to do business is just as crucial as recognizing our clients have a choice of lending agents

client on some of these challenges and the necessary steps needed to overcome them. Whether the client is willing to make the necessary changes to their program and, thus, their attractiveness is then down to their comfort level.

REINVESTMENT RISK IN TIMES OF STRESS

How would you define reinvestment risk, and how does it come into play during times of financial stress in the market?

Though we all have a general understanding of what reinvestment risk means, it is, in fact, made up of several forms of specific risk with the main ones being: counterparty, interest rate, liquidity, operational and roll-over risk. Understanding each of these risks allows one to better understand how various market changes will impact their program and how best to mitigate those risks. During times of market stress, clients are mostly concerned about counterparty risk and we find clients take comfort from agent indemnification. This generally means that clients prefer to be in indemnified repo reinvestment strategies than unsecured instruments such as commercial paper etc.

Can you provide recent examples of situations in which reinvestment risk may be heightened during times of economic uncertainty or market volatility?

Last month’s focus on the banking sector is a great example. For most securities lending programs, cash is invested in a mixture of outright investments, money funds and reverse repurchase agreements. Outside of buying treasuries, most investments include some form of exposure to the banking sector. Understanding the nature of these investments (unsecured versus collateralized; direct versus indirect), will help one understand their true exposure. For instance, having $10m invested in CP issued by one of the regional banks would have a very different risk profile to that same $10m CP being received as collateral in a triparty reverse repo transaction, with one of the European banks.

What strategies or techniques would you recommend to mitigate reinvestment risk in a portfolio during times of stress or market turbulence?

Understanding the different risks allows one to adapt guidelines to address and mitigate those risks.

• Worried about counterparty risk? Diversify away from direct investments, opting for collateralized investments instead.

• In a period of high inflation? Choose investments with frequent resets, so that the investment does not suffer from a below market interest rate.

Utilizing these mitigants as part of a core portfolio composition strategy, should help absorb a lot of the “noise” that portfolios can experience during times of market turbulence. For ultimate protection, try and work with partners that are willing to have skin in the game and share/cover loses, to ensure interests are all aligned.

Based in New York City, Vikas is a veteran securities finance professional with more than 20 years of diverse experience including trading, product development, business development and technology.

Mr. Nigam previously ran the trading and risk function for ASL; working closely with the client performance team to maximize alpha generation within client constructs on both the asset and liability front.

Prior to taking on the trading head role in 2018, Mr. Nigam ran Fixed Income trading (2016) and previously the International Equity book out of New York.

Mr. Nigam joined the ASL team in 2006, after spending 7 years running development teams focusing on equity and equity finance at Lehman Brothers. Mr. Nigam received a BSc (Hons) in Business Computing Systems from City University, London.

Perspectives on Securities Lending and the Canadian Market

What is driving growth in the Canadian market?

We continue to see growth in the fixed income segment with a particular emphasis on sovereign debt, as well as pockets of demand for corporate debt. As interest rates continue to rise, the pressure on corporate bond yields, which we noted in 2022, continues. This has resulted in increased borrower demand, not only in the domestic market but also in the European zone where a fast-paced rising interest rate environment has had a similar effect. We are still seeing stable opportunities in demand for sovereign debt—both on open and term with durations of up to 95 days. While demand for Canadian provincial bonds tends to fluctuate, the stable increase in Canadian sovereign debt demand continues to prove favourable for beneficial owners, with collateral optimisation and upgrade trading at the forefront of demand drivers. Canadian equity markets have seen positive quarterover-quarter returns with the re-emergence of Canadian cannabis specials, albeit with some fluctuations in rates. Corporate action optimisation opportunities continue to drive significant revenue opportunities for beneficial holders as five of the six major Canadian banks now offer discounted dividend reinvestment programs, presenting optionality lending opportunities.

What are the latest regulatory changes in Canada and what areas are impacted in the industry?

The impending shift to T+1 and the potential implementation of a “fails regime” on Bank of Canada government securities—both scheduled for implementation in 2024—remain top of mind.

With the recent announcement of T+1 implementation dates of May 27, 2024 for Canada and May 28, 2024 for the United States, the race is now on to adjust and adapt to the shorter settlement timeframe. Similar to the recent implementation of the Central Securities Depositories Regulation (CSDR) in Europe, we expect T+1 to drive significant technology enhancements into the securities lending value chain, as well as more efficient execution and settlement behaviour across the market.

Changes to processes, systems and behaviour patterns will be required by all participating stakeholders, including agent lenders, borrowers and beneficial owners alike. While this may be challenging to implement in a matter of 12 months, the resulting benefits will be substantial. Improved trade submission, recall management and security returns will only add to the sustainability of the financing market and its importance as a source of liquidity to the capital market system.

What are some current market conditions or events and their impact that you would like to shed some light on?

For the fourth year in a row, the first quarter has been marred by market turbulence. Over the past six weeks, we have seen the so-called “banking crisis” take shape and roil markets, which already had an undertow of volatility. While the focus has been predominantly on US regional banks, there have been wider-ranging implications at home and abroad.

The impact on securities lending participants is threefold: Counterparty management, collateral management

Kyle Kolasingh, Head of Market Services Solutions at RBC Investor & Treasury Services.

Optimizing portfolio performance

Optimizing portfolio performance

For over 35 years, RBC Investor & Treasury Services’ industry-leading securities finance program has been helping clients generate incremental returns through our trusted market expertise and established risk management framework.

For over 35 years, RBC Investor & Treasury Services’ industry-leading securities finance program has been helping clients generate incremental returns through our trusted market expertise and established risk management framework.

#1 Custodial lender in the Americas*

To find out how our team of specialists can deliver a securities finance program that meets your risk and return objectives, visit rbcits.com.

To find out how our team of specialists can deliver a securities finance program that meets your risk and return objectives, visit rbcits.com.

*Global Investor/ISF Beneficial Owners Survey Unweighted, 2021

*Global Investor/ISF Beneficial Owners Survey Unweighted, 2021

© Copyright Royal Bank of Canada 2023. RBC Investor & Treasury Services™ is a global brand name and is part of Royal Bank of Canada. RBC Investor & Treasury Services operates primarily through the following companies: Royal Bank of Canada, RBC Investor Services Trust and RBC Investor Services Bank S.A., and their branches and affiliates. In Luxembourg, RBC Investor Services Bank S.A. is authorized, supervised and regulated by the Commission de Surveillance du Secteur Financier (CSSF), and jointly supervised by the European Central Bank (ECB). In the United Kingdom (UK), RBC Investor & Treasury Services operates through RBC Investor Services Trust, London Branch and Royal Bank of Canada, London Branch, authorized and regulated by the Office of the Superintendent of Financial Institutions of Canada. Authorized by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available on request. RBC Investor & Treasury Services UK also operates through RBC Europe Limited, authorized by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Additionally, RBC Investor & Treasury Services’ trustee and depositary services are provided through RBC Investor Services Bank S.A., London Branch, authorized by the CSSF and ECB, and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available on request RBC Offshore Fund Managers Limited is regulated by the Guernsey Financial Services Commission in the conduct of investment business. Registered company number 8494. RBC Fund Administration (CI) Limited is regulated by the Jersey Financial Services Commission in the conduct of fund services and trust company business in Jersey. Registered company number 52624. RBC Investor Services Bank S.A. is a restricted license bank authorized by the Hong Kong Monetary Authority to carry on certain banking business in Hong Kong. RBC Investor Services Trust Hong Kong Limited is regulated by the Mandatory Provident Fund Schemes Authority as an approved trustee. Royal Bank of Canada, Hong Kong Branch, is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. This material provides information on the services and capabilities of RBC Investor & Treasury Services. It does not constitute an offer, invitation or inducement with respect to any service or financial instrument. RBC Investor & Treasury Services’ services are only offered in the jurisdictions where they may be lawfully offered and are subject to the terms of applicable agreements. This material is for general information only and does not constitute financial, tax, legal or accounting advice, and should not be relied upon in that regard. ®

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© Copyright Royal Bank of Canada 2023. RBC Investor & Treasury Services™ is a global brand name and is part of Royal Bank of Canada. RBC Investor & Treasury Services operates primarily through the following companies: Royal Bank of Canada, RBC Investor Services Trust and RBC Investor Services Bank S.A., and their branches and affiliates. In Luxembourg, RBC Investor Services Bank S.A. is authorized, supervised and regulated by the Commission de Surveillance du Secteur Financier (CSSF), and jointly supervised by the European Central Bank (ECB). In the United Kingdom (UK), RBC Investor & Treasury Services operates through RBC Investor Services Trust, London Branch and Royal Bank of Canada, London Branch, authorized and regulated by the Office of the Superintendent of Financial Institutions of Canada. Authorized by the Prudential Regulation Authority. Subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available on request. RBC Investor & Treasury Services UK also operates through RBC Europe Limited, authorized by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Additionally, RBC Investor & Treasury Services’ trustee and depositary services are provided through RBC Investor Services Bank S.A., London Branch, authorized by the CSSF and ECB, and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available on request RBC Offshore Fund Managers Limited is regulated by the Guernsey Financial Services Commission in the conduct of investment business. Registered company number 8494. RBC Fund Administration (CI) Limited is regulated by the Jersey Financial Services Commission in the conduct of fund services and trust company business in Jersey. Registered company number 52624. RBC Investor Services Bank S.A. is a restricted license bank authorized by the Hong Kong Monetary Authority to carry on certain banking business in Hong Kong. RBC Investor Services Trust Hong Kong Limited is regulated by the Mandatory Provident Fund Schemes Authority as an approved trustee. Royal Bank of Canada, Hong Kong Branch, is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. This material provides information on the services and capabilities of RBC Investor & Treasury Services. It does not constitute an offer, invitation or inducement with respect to any service or financial instrument. RBC Investor & Treasury Services’ services are only offered in the jurisdictions where they may be lawfully offered and are subject to the terms of applicable agreements. This material is for general

and inventory. Starting with the latter, we saw the likes of Silicon Valley Bank and Signature Bank New York shut down by federal authorities and subsequently suspended from their exchanges, while Credit Suisse persisted in the headlines. The immediate nature of this crisis required fast and nimble action to ensure that exposures were limited. Not unlike the meme stock craze and the Ukrainian-Russian conflict, robust risk management frameworks have been invaluable as periods of uncertainty are never one-sided. That said, such periods also bring opportunity, and the banking crisis is no different.

For a brief time, the situation led to a new sector of equities in the spotlight, resulting in rising demand to borrow US banking stocks and subsequently offering lending opportunities for beneficial owners. Timely and ongoing communication between agent lenders and beneficial owners have been equally important—from a risk management lens and due to the need for lenders to understand the risk/reward trade-off. This is an aspect of RBC Investor & Treasury Service’ lending program of which we are particularly proud—ensuring that our beneficial owners remain well-informed, reassured and aware of how market conditions are impacting their securities lending program.

On an industry-related note, the Global Alliance of Securities Lending Associations (GASLA) released an update to the Global Framework for ESG and Securities Lending (GFESL) in early March, providing market participants with an enhanced framework to consider the integration of ESG policies within their securities lending programs. GFESL focuses on five main areas where securities finance and ESG intersect—voting rights, collateral, lending over record dates, participation in the short side of the market and transparency. As the Coordinator for the Canadian Securities Lending Association and a member of the GASLA forum, I consider the Framework to be a significant contribution to furthering securities lending and ESG best practices for all stakeholders in the value chain.

Kyle Kolasingh oversees lender management for RBC Investor & Treasury Services’ (RBC I&TS’) Securities Finance program and leads the Market Services Solutions team — a crossproduct technical sales and relationship management team covering securities lending, foreign exchange and cash management products.

He has been with RBC I&TS since 2010 and previously worked for RBC Financial Caribbean. Over the past 12 years, Kyle has held various positions, including Corporate Actions and Entitlements, Risk & Investment Analytics and Proposal Management. In 2016, Kyle joined the Securities Finance team. Based in Toronto, he works closely with beneficial owners and internal partners in the providing securities financing products and solutions to the bank’s clients and prospective clients.

Kyle is also a member of the executive team of the Canadian Securities Lending Association and represents the association at the Global Alliance of Securities Lending Associations.

He holds a Bachelor of Administrative Studies with Honours in Finance from York University.

Changes to processes, systems and behaviour patterns will be required by all participating stakeholders, including agent lenders, borrowers and beneficial owners alike.