Global Investor Magazine Spring 2022 by SRP & FOW

Spring 2022 www.globalinvestorgroup.com

CUSTODY:

RBC PLANS TO TACKLE COMPLEXITY ON BEHALF OF BUY-SIDE CLIENTS

Derivatives: HKEX chief exec Nicolas Aguzin reflects on his first year

SECURITIES FINANCE US BROKER SOUTH STREET SEES NEW SOLUTIONS AS A KEY ATTRIBUTE

CARLO TRABATTONI Generali Asset & Wealth Management chief talks transformation

Teamwork and dedication are essential to the success of any organization. They are hallmarks of how we work with our securities lending clients and the standard by which our clients judge us. We understand that by serving our clients well, our own success will follow. To learn more about the capabilities, please contact Christel Carroll (617-204-2476) / Dennis Riley (617-204-2450) / Michael Daly (617-204-2479) Ryan Watt (+44-20-7051-8514) / Michael Furnival (+44-20-7774-8762).

EDITORIAL

The Compounding Effect In early May, Bank of England boss Andrew Bailey warned of “apocalyptic” hikes in food prices and suggested UK inflation could hit 10% later this year as the British central bank bumped interest rates for the fourth consecutive time. In the US, the Federal Reserve boosted its domestic lending rate by half a point and said more was coming, prompting US market watchers to predict a US rate of 3% by this time next year. Most rich countries are facing the same inflationary pressures amid rising energy and commodity costs linked to Covidrelated problems with global supply chains and the conflict in Ukraine. Rising interest rates are good for exchange groups, like Intercontinental Exchange and Eurex, that offer interest rate hedging products. They are also good for banks and brokers who can make a tidy return lending out their cash balances in the overnight, short-term repo market. Indeed, this year has been a busy one for the world’s futures and options firms as economic uncertainty has translated into sporadic bouts of volatility, increased use of hedging tools and decent earnings for exchanges and their clients. Less welcome however is the prospect of a new round of financial regulation. Global policymakers (led by Europe) are still struggling with the application of anti-procyclical (APC) margin measures for clearing houses, designed to tackle some of the problems that emerged in the period of extreme volatility immediately after the start of the Covid pandemic in March 2020. During the ISDA AGM in Madrid in May, Nicoletta Giusto, independent member of the ESMA CCP supervisory committee, said that body has delayed its planned update to APC margin rules to undertake a further consultation focused on clearing member clients. Giusto said: “The responses we have seen so far have been really differentiated depending on the class of market participant - infrastructure, dealers, clients and so on - so we will have to arbitrate and balance between those interests. The stability of the central counterparty is our main goal, but without putting undue stress on market participants.”

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The International Swaps and Derivatives Association and other trade bodies have suggested in recent weeks the APC rules as currently drafted are too heavily weighted in favour of the central counterparties (CCPs) and do not adequately reflect the needs of the clearing members. Ulrich Karl, head of clearing services at ISDA, said at the conference: “Our key point is that clearing members, clients, CCPs and regulators should agree what a good level of procyclicality should be and then define a standardised measure to assess CCP models against the agreed levels of procyclicality.” Verena Ross, the chair of the European Securities and Markets Authority, also gave an update on the proposed introduction of a consolidated tape for listed derivatives, a very touchy subject. She said: “We hear your concerns regarding this proposal and, in particular, about the possible impact it could have on systematic internalisers or, more generally, the liquidity available through them. As we all know, the question about where to strike the balance between transparency and liquidity is not new.” Also speaking at the ISDA AGM were Securities and Exchange Commission chair Gary Gensler and Commodity Futures Trading Commission chair Rostin Behnam. The prospect of a new wave of regulation may not be welcome in the industry, particularly in light of a recent report from a hedge fund that suggests liquidity has dried up in the past four years as a result of post-financial crisis regulation. But there is some confidence to be drawn from the fact that top regulators like Gensler, Behnam and Ross continue to make themselves available and accountable to the industry they oversee. As we emerge from the Covid pandemic, conferences like ISDA’s and those organised by Global Investor are playing again an important role in developing the conversation between regulated firms and those that regulate them. Luke Jeffs, Managing Editor, Global Investor Group

EDITORIAL Managing editor Luke Jeffs Tel: +44 (0) 20 7779 8728 luke.jeffs@globalinvestorgroup.com Derivatives editor Radi Khasawneh Tel: +44 (0) 20 7779 7210 radi.khasawneh@euromoneyplc.com Senior reporter, Securities Finance Ramla Soni Tel +44 (0) 20 7779 7246 ramla.soni@euromoneyplc.com Design and production Antony Parselle aparselledesign@me.com BUSINESS DEVELOPMENT Business development executive Jamie McKay Tel: +44 (0) 207 779 8248 jamie.mckay@globalinvestorgroup.com Sales manager Federico Mancini federico.mancini@euromoneyplc.com Head of sales, News & Insight Sunil Sharma Tel: +44 (0)20 7779 8556 sunil.sharma@totalderivatives.com Divisional director Jeff Davis Chairman Leslie Van de Walle Chief executive Andrew Rashbass Directors Jan Babiak, Colin Day, Imogen Joss, Wendy Pallot, Tim Pennington, Lorna Tilbian © Euromoney Institutional Investor PLC London 2022 SUBSCRIPTIONS UK hotline (UK/ROW) Tel: +44 (0)20 7779 8999 US hotline (Americas) Tel: +1 212 224 3570 hotline@globalinvestorgroup.com RENEWALS Tel: +44 (0)20 7779 8938 renewals@globalinvestorgroup.com CUSTOMER SERVICES Tel: +44 (0)20 7779 8610 customerservices@globalinvestorgroup.com GLOBAL INVESTOR 8 Bouverie Street, London, EC4Y 8AX, UK globalinvestorgroup.com Next publication Summer 2022 Global Investor (USPS No 001-182) is a full service business website and e-news facility with supplementary printed magazines, published by Euromoney Institutional Investor PLC. ISSN 0951-3604

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CONTENTS

REGULAR FEATURES: 6

18 Environmental, social and governance (ESG) guru Amy Domini believes that sustainable strategies will evolve to become the defining investment theory of our time

Trading Places: Robeco hires Prins from APG to replace van Baardwijk as COO; RBC I&TS has promoted Juhi Chikhlia to run Asia-Pacific; BNY Mellon moves Regelman to run issuer services; Cboe hires SGX’s Patimova to boost European sales

20 The Ukraine crisis has thrown Europe’s energy policy into disarray and posed some interesting questions about the role of natural gas and nuclear in the transition to net carbon zero

Highlights from GlobalInvestorGroup.com: Liquidity has fallen in past four years due to regulation, a hedge fund has said; Securities finance revenue up a third in April; State Street admits for first time BBH deal may not go through; CME chief Terry Duffy has opposed FTX’s bid to offer direct clearing

DERIVATIVES: 22 Hong Kong Exchanges and Clearing chief executive Nicolas Aguzin reflects on his first twelve months in charge of the Asian exchange giant, a year that has included internal restructuring, the redoubling of HKEX’s commitment to China and the LME’s nickel suspension

ASSET MANAGEMENT: 10 Generali Asset & Wealth management chief executive Carlo Trabattoni reflects on five years driving transformation at the Italian asset manager and its progress in developing a multiboutique model

30 Asian broker BPI Financial Group is looking to expand its successful franchise outside of Asia and explore new asset classes beyond its core markets of iron ore and steel

16 Amundi chief operating officer Guillaume Lesage has outlined his plan for the French asset management giant’s new technology business, including the development of ESG products

32 The International Swaps and Derivatives Association hosted in May its European conference in Madrid, attracting many of the key international figures in derivatives regulation

Spring 2022

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CONTENTS

36 The last phase of the Uncleared Margin Rules will take effect in September this year, bringing into scope the smallest trading firms in the regulation’s six year history

CUSTODY: 46 RBC Investor & Treasury Services’ head of middle office product and profitability Ben Pumfrett discusses the challenge of managing complexity on behalf of clients

39 Cboe Global Markets plans to leverage its status as the premiere US options exchange by delivering more products tailored to the increasingly active retail trading community

SECURITIES FINANCE: 50 Proactively engaged. How do you approach the discussion with a prospective or an existing client when it comes to the types of assets that are truly additive and important to securities lending activity? By John Fox, Director, Head of Securities Finance Sales & Relationship Management Americas, BNY Mellon

40 Banks are increasingly looking to reduce their counterparty exposure by switching their FX derivatives positions to exchange-traded or cleared derivatives 41 LCH CDSClear has said it is using fee waivers to incentivise use of its new client index options clearing service and attract more clearing brokers to the platform

53 US broker South Street Securities Holdings has said the development and delivery of new solutions are key opportunities to set itself aside from its peers

42 TP ICAP wants to add Latin American foreign exchange instruments and include forwards as the London-based group eyes ambitious targets for its FX platform

56 The Global Investor Beneficial Owners Survey 2022 recognises the leading firms working with beneficial owners to support their dynamic lending programmes

43 Robert Catani, head of Institutional Sales and Trading Fixed Income & Derivatives at TMX, sees emerging opportunities in the Canadian exchange’s longer dated interest rates segment

Spring 2022

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TRADING PLACES

Trading Places Post-Bonus is always a busy time for People Moves ASSET MANAGEMENT: Macquarie Asset Management hires infrastructure expert Macquarie Asset Management has named Barclays’ Susana Leith-Smith as a senior managing director to support its infrastructure and real asset investment activities in Europe, the Middle East and Africa. The asset manager said in April London-based Leith-Smith reports to Martin Bradley, head of real assets in Emea at the asset manager. ‘Susana’s appointment marks an exciting stage in the expansion of our infrastructure and real assets franchise in the region,’ said Bradley. Robeco hires Prins from APG as chief operating officer Robeco has hired the chief operating officer from rival APG Asset Management to become its COO, replacing Karin van Baardwijk who has been promoted to CEO. The Dutch ESG manager said Marcel Prins will become its chief operating officer on June 1.

Prins takes over from Van Baardwijk who served in the role for five years before being named as Robeco’s chief executive officer on January 1 of this year. Fidelity Investments creates 12,000 jobs Fidelity Investments said it has created more than 12,000 new jobs that it plans to fill by the end of September. The jobs will put the company on track to meet or exceed its hiring in 2021, which saw 16,600 new hires – more than double the 7,200 associates hired in 2020, the firm said. Fidelity said: “These increases come as we sustain growth across our businesses, including in assets under administration, daily trades, and advisory assets.”

SECURITIES FINANCE: Citi Australia makes eight hires in markets and research Citi Australia has expanded its markets and research business with

RBC I&TS promotes Chikhlia to lead APAC lending Royal Bank of Canada’s Investor & Treasury Services (RBC I&TS) has promoted Juhi Chikhlia to lead securities lending in the Asia-Pacific region. RBC I&TS confirmed the appointment saying she will be relocating to Singapore from London. Chikhlia started her financial services career at RBC I&TS in London four years ago. Since then, she has held several analyst roles including product management graduate analyst, securities finance graduate analyst and client experience graduate analyst. More recently, she has been a securities lending trader since 2020. OCC hires Knapp from BBH to lead lending business The Options Clearing Corporation (OCC) has hired Oberon Knapp from Brown Brothers Harriman as executive director of participant solutions in the US clearing house’s securities lending business. The OCC said: “Knapp will play a vital role in developing the strategy and vision for the future of our securities lending function.” Boston-based Knapp will report to Pat Hickey, OCC’s managing director of participant services and solutions.

KARIN VAN BAARDWIJK

Spring 2022

eight new hires in trading, prime services and securities finance. Howard Ilderton has re-joined the bank as head of linear product and trading for Australia and New Zealand. He re-joins Citi from Credit Suisse where he led the Japan prime and Asia-Pacific securities lending team. Prior to these positions, Ilderton was part of Citi’s prime and Delta One team from 2007 to 2014. Will Buttigieg will also join Citi’s equity trading team in July after 17 years at UBS in Sydney where he has held various trading roles in equity derivatives and facilitation.

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TRADING PLACES

bank’s co-head of securities services in China. Song will run the business line with Philippe Kerdoncuff, who has been in the role since 2016. Song is based in Shanghai and reports to CG Lai, chief executive officer of BNP Paribas China Limited, and Franck Dubois, head of Asia Pacific for BNP Paribas Securities Services. ROMAN REGELMAN

CUSTODY: BNY’s Regelman to replace La Salla running issuer service BNY Mellon has promoted Roman Regelman, its head of asset servicing and digital, to become chief executive officer of its issuer services business, replacing Frank La Salla who is moving to the DTCC. BNY Mellon said: “Regelman’s appointment further enhances the bank’s mission to create synergistic opportunities to build global scale and infrastructure for all asset types, expand access to capital around the world and further enable a resilient, capital markets ecosystem.” Regelman, a member of the executive committee, will continue to lead digital for BNY Mellon, a post he has held since joining the bank in 2018. BNP Paribas hires co-head of Chinese custody from Deutsche BNP Paribas has hired Stanley Song from Deutsche Bank as the French

STANLEY SONG

Spring 2022

ELENA PATIMOVA

MUFG appoints managing director and head of Cyprus office Mitsubishi UFJ Financial Group (MUFG) Investor Services has appointed Yannis Matsis as managing director and head of the recently opened Limassol office in Cyprus. Matsis will be responsible for the firm’s local asset servicing footprint, growth within the Cypriot market and business expansion activities in Europe and the Middle East, MUFG said. He brings to the global asset servicing arm of MUFG more than 20 years of professional experience in senior positions, having built and managed global debt capital market teams in London, New York, Tokyo, Hong Kong, Singapore and Sao Paulo.

DERIVATIVES: Standard Chartered co-head of prime Sterry leaves bank Standard Chartered Bank’s co-head of prime services Andrew Sterry has left the firm after nine years. Sterry, who joined the British bank from Citigroup in 2013, left Standard Chartered in April, according to sources close to the firm. A spokesman for Standard Chartered Bank confirmed Sterry’s departure. Sterry was Standard Chartered Bank’s London-based managing director and co-head of prime services since he was hired in mid-2013 to build the group’s prime division from the ground up.

Cboe makes senior sales hire in European derivatives Cboe Global Markets has hired an SGX director for its European derivatives venue, as it looks to support volume growth amid an expansion of its product suite. Elena Patimova, formerly director of equities and FICC at SGX, joined the US group in May, according to Cboe NL president and head of Cboe Europe Derivatives Ade Cordell. Cordell told Global Investor: “Our new director of sales for European derivatives joins us in mid-May. We look forward to that, and further building the team over time to support that evolution.” CME creates EMEA role amid international business rejig CME Group created in April a head of EMEA role amid a raft of management changes in its international business including the announcement of the retirement later this year of international chief William Knottenbelt. The Chicago-based exchange group said Michel Everaert will be its new managing director and head of EMEA based in London. Everaert has been with the firm for 11 years in its client development and sales team. He was most recently co-head of CD&S for EMEA with Serge Marston, who will now be in charge of the division. Elsewhere, Russell Beattie was hired to replace Chris Fix as managing director and head of Asia Pacific at the firm after Fix retired in March.

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EXCLUSIVES FROM GLOBAL INVESTOR GROUP

Breaking stories from Global Investor Group Here are some of the top stories you may have missed at GlobalInvestorGroup.com investment manager Capstone Investment Advisors issued a research note in May that claims liquidity has suffered in recent years. Jordan Sinclair, director and derivatives research specialist at Capstone, said: “At the beginning of 2018, we started noticing a dramatic fall in the depth of the market. Whilst the market liquidity can move around, its depth has never truly returned to its former levels in over four years.”

CHRIS CUMMINGS

ASSET MANAGEMENT: Retail funds saw outflows increase a third in March - data Retail funds saw outflows increase by more than a third to £3.4 billion in March, driven by uncertainty linked to the Russian invasion of Ukraine, the Investment Association has said. The London-based trade body said fixed income funds saw outflows of £3.3bn due to escalating inflation and increased central bank intervention while European equity funds were down £500m and UK funds lost £563m. Chris Cummings, chief executive of the Investment Association, said: “Investors remained cautious in March in light of monetary tightening and Russia’s invasion of Ukraine.” Regulation has cut liquidity in past four years - hedge fund Market liquidity has reduced in recent years due to market structure changes linked to the regulatory reforms ushered in after the financial crisis of 2008, a hedge fund has said. New York-based alternative

Spring 2022

Chinese investors turn bearish on China A-shares Chinese investors have turned bearish on the main Chinese blue chips and real estate names partly due to the Covid lockdowns still in effect in some of that country’s main cities. The poll conducted in March found that only 60.9% of 2,500 Chinese investors asked were bullish about Chinese A-shares stocks while only 55.9% were confident house prices in Chinese cities will rise in the next 12 months, down from 69.4% at the end of 2020. The quarterly Investor Sentiment survey from Cheung Kong Graduate School of Business (CKGSB) also found that professional investors were more optimistic than retail investors, with 79.7% of finance professionals confident that Chinese shares would rise versus just 54.9% of retail players.

Short-position data from the intelligence firm based on aggregate short positions in European Securities and Markets Authority-regulated countries showed that industrials and consumer discretionary have consistently been the most shorted sectors so far in 2022. ‘Digitalising infrastructure’ helps improve client experience Sharegain Fintech Sharegain has said that “digitalising capital markets infrastructure” is a key function in improving the client experience. Speaking after Sharegain delivered in May new connectivity options through the cloud, Benjamin Smith, senior product manager at Sharegain, said: “Digitalising capital markets infrastructure is one of the best ways to improve client experience as digital and cloud-connected services, as opposed to on-premises hardware that require manual intervention and maintenance, enable companies to provide their end clients with more control and increased transparency.” Securities finance revenues up a third in April - IHS Markit Global securities finance revenues reached $1.058 billion (£859 million) in April, a 32% year-on-year rise, according to new research from IHS Markit. Paul Wilson, managing director, securities finance at IHS Markit, part of S&P Global, said: “The year-onyear increase was primarily the result of equities, with all regions showing

SECURITIES FINANCE: Industrials continue to be most shorted names in Europe - data Industrials stocks were the most shorted names in Europe for the fourth consecutive month, according to new data from SEI Novus.

PAUL WILSON

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EXCLUSIVES FROM GLOBAL INVESTOR GROUP

year-on-year growth. Average daily global revenues decreased 2% in the month compared with March. American equities and global exchange-traded products are notable in revenue growth driven by both year-on-year increase in balances and fees.”

average at least for the short term but it remains to be seen what we will see in the third and fourth quarter of this year.”

CUSTODY: State Street says approvals ‘may prevent or delay’ BBH deal State Street said in May for the first time its planned acquisition of rival Brown Brothers Harriman (BBH) Investor Services may not complete, suggesting regulatory approvals and other closing conditions “may prevent or delay the consummation of the acquisition”. The US banking group said it is it is looking at potential modifications to the transaction to help resolution of the bank regulatory review. State Street said: “The consummation of our planned acquisition of the BBH Investor Services business is subject to the receipt of regulatory approvals and the satisfaction of other closing conditions, the failure or delay of which may prevent or delay the consummation of the acquisition.” Euroclear’s fund platform launches ESG reporting solution Euroclear’s global digital fund distribution platform MFEX has launched a regulated environmental, social, and corporate governance (ESG) reporting solution for asset managers. The firm said the service adheres to the European ESG Template (EET) that complies with the upcoming regulatory requirements under the sustainable finance disclosure regulation level 1, to be applied by January 2023. The EET allows asset managers to consolidate their reporting on the European green taxonomy as well as other European regulatory requirements, the firm said.

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FRANK LA SALLA

DTCC names BNY Mellon’s La Salla as president and CEO The Depository Trust & Clearing Corporation (DTCC) has appointed Francis (Frank) La Salla, currently chief executive officer of BNY Mellon’s issuer services arm, as its next president and chief executive officer of the company, effective August 12. DTCC said: “La Salla’s appointment reflects our board’s long-term succession planning and rigorous search process with the scheduled retirement of Michael Bodson, who has served as DTCC’s chief executive officer since July 2012.”

DERIVATIVES: Euronext sees volatility over ‘short-term’ as earnings jump Euronext said it expects trading volatility to continue in the “shortterm” as the European exchange reported its strongest ever quarter by revenue and raised its cost saving expectations from its merger with Borsa Italiana. The group that operates markets in Paris, Amsterdam and Brussels reported in May first quarter revenue of €395.7 million (£334.4m), its highest ever in a three month period. Giorgio Modica, chief financial officer of Euronext, said: “We believe the volumes will be higher than

ICE switches Euroclear sale to French, Belgian state funds Intercontinental Exchange (ICE) has agreed to sell its stake in Euroclear to two European government-owned investment funds, switching from a previously announced sale to a private equity firm. The Atlanta-based exchange agreed in October a €709 million (£598m) disposal of its stake to American fintech investor Silver Lake. But ICE said in May it will now sell its 9.85% stake in Brussels-based Euroclear to French government owned Caisse des Dépôts et Consignations (taking 5.42%) and to Belgium government owned Société Fédérale de Participations et d’Investissement (taking 4.43%). CME chief Duffy slams idea of limited scope for FTX CME chief executive Terry Duffy has criticised the idea of a limited test phase to enable crypto firm FTX to secure US regulatory approval for its direct clearing venue. The chairman and chief executive officer of CME Group told the House Agricultural Committee in May: “We do not see how the commission could credibly make this finding or legally limit its approval even on a test basis to crypto only.”

TERRY DUFFY

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ASSET MANAGEMENT

COVER FEATURE: CARLO TRABATTONI, GENERALI ASSET & WEALTH MANAGEMENT

Generali Asset & Wealth chief Trabattoni reflects on five years’ transformation Carlo Trabattoni became head of Generali Investments Partners in 2017 after more than 20 years at Schroders and has since then managed an ambitious programme of transformation at the Italian asset manager. In March last year, he was promoted to chief executive of Generali Asset & Wealth Management. By Luke Jeffs Founded on Boxing Day 1831 in Trieste, Generali has built in 190 years a prodigious reputation as the preeminent Italian insurer. Managing over €700 billion (£595bn) of assets on behalf of 67 million customers globally, nobody can challenge Generali’s insurance credentials. Given the Group’s insurance pedigree, it is understandable that its asset manager Generali Investments has had historically a strong bias to fixed income but that has changed under Trabattoni. He told Global Investor: “Generali Investments today is not what Generali Investments was in 2017 when I joined. There has been a massive transformation that we have gone through to look like we

do now. The watershed moment for our business was in 2017 when the group’s CEO Philippe Donnet stated that Generali had to be looked at as an insurance and asset management company.” Looking back over the past five years, Trabattoni added: “Since 2017, we have decided to step into the asset management world by leveraging what we already had which was mainly our fixed income capability linked to our insurance background. “Since then, we have decided to enlarge and broaden our investment capabilities by launching a multi-boutique platform. We achieved this in two fashions: the first one was to give value to what we already had, i.e. fixed income and Liability Driven Investment capabilities, together with

Since 2017, we have decided to step into the asset management world by leveraging what we already had which was mainly our fixed income capability linked to our insurance background Spring 2022

a private asset segment that focused on real estate and private equity that were part of the group. “When it came to equity, more sophisticated fixed income, ESG and other parts of the private debt universe for example, we had more limited competencies. So we started by identifying capabilities that were either existing in the market or we would be able to set-up with a selective group of partners in order to launch new initiatives, to create quickly an offer that would be competitive for our clients.” The multi-boutique approach to asset management has become popular in the past decade, combining the performance of boutiques with the resources and reach of a global asset management group. US exponents include the Affiliated Managers Group (AMG), BNY Mellon, Legg Mason and PGIM (formerly Prudential Investment Management) though European practitioners are less common.

Trabattoni outlines the business model: “We set-up, from the ground up, a few boutiques off the back of a model based on Generali having the majority of the venture while the partners provide the intellectual capital, i.e. the investment capability.”

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Spring 2022

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ASSET MANAGEMENT

CARLO TRABATTONI

ASSET MANAGEMENT

COVER FEATURE: CARLO TRABATTONI, GENERALI ASSET & WEALTH MANAGEMENT

The plan was to diversify Generali Investments into new markets, enabling the firm both to attract new clients and win more business from its existing customers. “We have set-up initiatives in a number of different segments – infrastructure debt, high octane equity, so focused on pure alpha generation rather than a benchmark, and, last but not least, an initiative in multi-asset,” the chief executive said. “These businesses were non-existent until 2018. The formula was simple. Generali was the largest shareholder, setting up the company with the partners and launching the registered entity in different jurisdictions so that’s France, the US and Italy, by providing investment capital to support the launch.” The Generali Investments strategy was also multi-faceted, however, and includ-

Trabattoni: “Ultimately, we are doing this because we want to compete with the largest players globally.”

Spring 2022

ed two key acquisitions. Trabattoni and his team bought in February 2019 Sycomore Asset Management, the leading French environmental, social and governance investment expert. The Sycomore acquisition came just two months after Generali acquired in December 2018 CM Investment Solutions, the London-based alternative asset management arm of Bank of America Merrill Lynch that had at the time $11bn (£9bn) under management. Generali subsequently renamed the business Lumyna. Trabattoni said: “When we look back at recent history, at the time of pandemic, we had a set of businesses that were either mature – Sycomore or Lumyna – or others that were just starting. But it is important to remember that we also had over €600bn from our existing fixed income business on our balance sheet so this allowed us some tranquillity as we worked through a difficult environment from 2020 onwards.” This allowed Generali to pursue its transformative agenda through the Covid pandemic and start to deliver earlier on its business objectives. The chief executive said: “The numbers we have been able to produce have been quite significant from an asset management perspective. Not only have we been able to come out with new flows and rais-

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ing assets but we have also been able to contribute positively to the bottom line of the group. Total assets under management grew from €456bn at the end of 2018 to €575.3bn at the end of last year. In the same period, assets from third parties grew from €27bn to about €113bn.” Yet Trabattoni admits Generali has further to go in this transformation. “When you look at our operations at the moment, you should look at us as a traditional asset manager because the fixed income book makes up the bulk of the assets we have, but, on the other hand, we are an asset manager that is transforming itself by the addition of new capabilities that we pursue and build through the partnership model.” Trabattoni’s transformational agenda is part of a broader growth strategy that involves competing with the best in the business, he says. “Ultimately, we are doing this because we want to compete with the largest players globally. If you go back to 2017, the vast majority of our client base were group clients, so we had no external clients. To develop our non-captive client base, we had to build out a sophisticated offering and create a proper third-party mentality based on servicing non-captive clients. “It is a challenging way forward that we have chosen for ourselves but it will give us the opportunity to diversify the bottom-line by adding other channels and diversifying the revenue streams. We have set an ambitious 2022-2024 plan to further grow our business in terms of clients reach and offer. For this, we need to cultivate what we have in our garden already. This means for example consolidating our LDI capabilities, growing our ESG platform through Sycomore, expanding our infrastructure debt capabilities that we have in France.” In terms of opportunities, Trabattoni said he and his team are keen to grow the firm’s real assets and private assets capabilities though these already represent “quite a significant part of our business”. He said: “At this time, Generali has more than €56bn of private assets under management, including over €35bn of

Spring 2022

real estate, which makes us the largest in Europe. We have over €3bn in infrastructure debt, we have €10bn in private equity and €7bn in private debt but we think we can do more and should do more, in particular when it comes to European loans and this is where we are going to invest more in the months and years to come.” The development of the firm’s investment capabilities is only part of the challenge however. “All of this is very nice but you need to sell it to the clients so you need to bring it to the end consumers. Whilst we have a strong footprint in Italy, in the past years we have started to develop our presence in France, Germany and Spain. We are starting to develop our presence in Switzerland, we are looking at the Nordics and, for the beginning of next year, we are starting to look at Asia. Distribution is at the core of the 2022-2024 plan. “The model is a local-based model controlled centrally so we have a global product range that we would offer at the local level through Luxembourg-based products as you would expect. We will open offices in different parts of Europe as we have done so in Paris, Milan, Madrid, overseeing the Iberia region, Frankfurt and Zurich, and, when it comes to Asia, we think we will go with Singapore.” Generali China Asset Management was founded in 2013 and was the first joint venture insurance asset manager approved by the China Insurance Regulatory Commission. Trabattoni added: “We already have joint ventures and long-standing relationships in China that we will continue to leverage to develop products at the local level.” As well as geographic reach, the chief executive is also keen to use technology to develop new channels of distribution. He said: “Digital is already a big part of what we do and the advantage we have over some of the other houses is that we are relatively new to this and we are starting from scratch so we want to try to leverage as much as possible the digital footprint and one area that we are investing money at a group level in ma-

Generali Investments in Numbers:

1 Main Distribution Hub

9 Asset Management Firms

20+ Countries Covered

190 Years of Experience

1,200+ Asset Managers and Specialists

583.4bn Assets Under Management in Euros Source: Generali Investments

chine learning initiatives and specifically machine learning in asset allocation. “Experimenting with new technologies like Blockchain is also crucial to gain a strategic knowledge on how the asset management industry could benefit from the tech-revolution. I’m thrilled to say that we are among the first European players

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ASSET MANAGEMENT

COVER FEATURE: CARLO TRABATTONI, GENERALI ASSET & WEALTH MANAGEMENT

ASSET MANAGEMENT

COVER FEATURE: CARLO TRABATTONI, GENERALI ASSET & WEALTH MANAGEMENT

world before February 24 and there is a world after February 24. After that awful day, the attention of market participants was more on central banks and which kind of approach they were going to take towards increasing inflationary pressure. “Initially, the Fed and the ECB were initially showing their intention to remove their monetary support and everyone was settling on an increasing inflation rate although under control but the Rus-

written from the ground up.” And, of course, the European energy crisis is taking place as individual countries try to plot their course to net-zero carbon emissions, added further complexity. Trabattoni said: “Up until a few months ago, nuclear was not something you could pronounce when you were mentioning ESG now the big question is whether ESG will enlarge to include nuclear? Also, will traditional sources of energy like oil or coal be reconsidered because of the current situation? These are factors that I think we influence the ESG paradigm. “Regardless of the peace talks, we are going to see volatile markets for a while and this is also because all of the central banks will have to look at how to model the future growth scenarios. Even before the aggression in the Ukraine, many cen-

the European energy policy has to be re-

Sycomore, which boasts 20 years of

Regardless of the peace talks, we are going to see volatile markets for a while and this is also because all of the central banks will have to look at how to model the future growth scenarios.

to have carried out a market transaction based on blockchain infrastructure.” The last part of the Generali transformation programme concerns the historic firm’s culture. “We are also strengthening our international culture and mindset. Yes, we’re an Italian brand but our parent group’s activities are across the world and we definitely want to follow its steps. Our clients want a top standing service, performances and to be listened. We can speak their language wherever they are,” Trabattoni said.

Global Headwinds Generali Asset & Wealth is working hard to reshape its business but it is doing so in a challenging investment environment. At the time of writing, the Italian bluechip MIB benchmark was down 13% this year, the main French index was off 12% and Germany’s DAX was down 13%. Reflecting on recent market moves, Trabattoni said: “Credit markets have suffered but, especially in Europe, I think there is the possibility to start looking at credit when you have higher quality issuers as it appears the market could be more benign. If you faint of heart, equities are going to present you with some challenges in the short term. Unless you have a long-term view, I’d suggest you stay away from equities. If you are invested, I would strongly suggest not to touch what you have invested in – quality will always come back. The irrational and erratic behaviour is solely because of the uncertainty of the scenarios. Citing the start of Russia’s military offensive on Ukraine, the Generali Asset & Wealth chief added: “We all hope that we will quickly move to a different scenario where everything has settled but it is important to remember there was a

Spring 2022

sian invasion presented us with a scenario that I don’t think anyone thought was possible – namely that Europe could be on the verge of a recession. “Even if we want to exclude Russia from the discussion, the situation in Europe is going to take some time before it gets back to normal, whatever ‘normal’ will look like.” The Russian action in Ukraine has thrown Europe’s energy strategy into disarray and forced some European governments into tough decisions. “If you think about gas supply, I don’t know to what extent Europe will go back to looking at Russia as the main supplier. Europe will have to rewrite its energy policy from the ground up and this would require new flows but also to understand, at single country level, how we can become less dependent on certain countries or certain sources of energy.” The choices facing individual administrations are linked to historic decisions they have made around energy provision, and specifically nuclear. Trabattoni said: “France took the choice of going nuclear many years ago whereas Germany decided about Fukushima in Japan to progressively decommission all of its nuclear plants while Italy chose not to use nuclear power many years ago so

tral banks were facing strong single-digit percentages of growth and now we are talking about a recession.” Given the energy problems in Europe, Trabattoni has adopted a pragmatic stance on ESG investments. He said: “There is still room for the energy sector and the themes that are linked to the scarcity of commodities to come back when the war scenario will have settled. I think this could be more of a buying opportunity than a selling obligation but, if anyone is invested, I would stay invested. If anyone is looking to invest, it is a good moment but expect significant volatility.” The chief executive said Generali Investments has pledged to exclude investment in thermal such as coal etc in OECD countries by 2030 and by 2040 for the rest of the world, and to be carbon neutral by 2050. He continued: “If things get prolonged, I suppose it may come to coal re-investment or net-zero, firms will have to look at that in the context of what could be an energy crisis. For the moment, nothing has changed however. The group has committed from €8.5bn-€9.5bn of sustainable investments up until 2025 so we are very much looking at ESG as an integral part of our investment approach.”

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market-leadership in ESG and €9bn of assets under management in European Commission-regulated Article 8 and Article 9 funds, is the Italian firm’s focal point for ESG activity. Trabattoni said it is important for the group to develop a sophisticated ESG strategy “because this is what is being requested by our client base”. He added: “When it comes to the offer for non-captive clients, all of our products are going to be Article 8 or Article 9 so ESG is at the core of our investment decision-making.” But the Generali Asset & Wealth chief feels that more work needs to be done by the investment industry and its regulators. “The industry has to find a proper position here, it has to find a balance between very strong beginnings for ESG and the

reality.” Trabattoni said: “If you look at the result of the structural under investment in energy, which is illustrated in the fact that energy prices are going through the roof, are we prepared to move towards a full ESG approach or is it the transition that we have to work upon? Those transitions cannot protect those firms that will not match the principle of ESG but we can’t abandon them. We have to help them transition to a new reality.” The European Union’s taxonomy and Disclosure Regulation have drawn criticism in recent months for being of only limited use in determining what is and isn’t a sustainable investment. Trabattoni continued: “It is important that the industry sets some rules for itself that are not so draconian. This dreadful episode in the Ukraine is showing us that if an energy shock comes, we may all be forced to move back to something that we have to reinclude in our portfolios. This is something that we have to work on from an industry perspective.” The Generali Asset & Wealth chief said the inclusion in the European taxonomy of nuclear energy is an example of ESG standards responding to real-world issues. “There has been a strong push towards something that I think is incredibly im-

Spring 2022

portant but, now, from the extreme, we have to go back and position ourselves a bit that is a reflection of the world we live in.” In the same vein, Russia’s attack on Ukraine raises some interesting questions about defence stocks, and whether it is appropriate to invest in these names. Trabattoni said: “Up until a few months ago in Europe, the word ‘defence’ was not

on the table. But now we are asking if defence is so vital to maintain peace, is the analogy that defence causes social harm not strange? He added: “This is of course a current debate but I’d suggest that defence is going to be an important part of rebuilding of our European assets so would you exclude those from your portfolios right away?”

Carlo Trabattoni

CEO Generali Asset & Wealth Management Joined Generali in September 2017 as Head of the Multi Boutique Platform, based in Milan. Career Prior to Generali, Trabattoni was the Head of pan-European distribution and Global Financial Institutions group for Schroders where he spent over 20 years covering various roles based in UK, Continental Europe and Japan. In his career he held a number of executive committees and board positions in national associationS and business units (Schroders International Sicav, Schroders Italy, Schroders Tokyo, Schroders UK). He became Head of Distribution, Advisor to the CEO in Santander AM in London from August 2016 until February 2017. From October 2018, he was the Managing Director of Generali Investments Partners Sgr S.p.A. and became board member of the following companies: Generali Global Infrastructure, Aperture Investors LLC, Aperture Investors Ltd UK, Aperture Investors Sicav, Generali Real Estate SGR, Lumyna Investments Ltd, Sycomore Factory, Plenisfer Investments SGR. Trabattoni holds a Bachelor of Economics degree from Bocconi University.

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ASSET MANAGEMENT

COVER FEATURE: CARLO TRABATTONI, GENERALI ASSET & WEALTH MANAGEMENT

ASSET MANAGEMENT

ESG – AMUNDI TECHNOLOGY

Amundi Technology to develop ESG offering - COO Amundi Technology has said it plans to build out its environmental, social and governance (ESG) offering this year and beyond. Europe’s largest asset manager launched the tech business in March last year to expand the sale of its technological solutions to asset managers and other investment and savings firms. Currently, Amundi Technology has an ESG offering but it is looking to expand it over the coming years. Speaking to Global Investor, Guillaume Lesage, chief operating officer of Amundi, says: “With ESG there are at least three domains. The first one is making sure that you’ve got the data and that you can calculate all the analytics and the ratings. In this space, we integrate 25 different ESG data sources to calculate ratings for those companies and measure the portfolios.” Amundi Technology selected at the start of this year fintech Causality Link to provide insights into drivers of ESG investment performance. The second area of focus for Amundi Technology within ESG is concerned with reporting, specifically regulatory reporting. “These are very complex reporting requirements, and you need to be able to clean the data, and have people who know the regulations and can adapt if and when they change,” adds Lesage. Reporting requirements for nonfinancial disclosures vary between regions. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) came into force last year and mandates that managers label their products according to their sustainability levels. Article 8 products under SFDR promote environmental and social characteristics while an Article 9 fund has sustainable investment as its objective. Article 6 products do not promote ESG and do not have any sustainability objectives.

Spring 2022

Guillaume Lesage, chief operating officer of Amundi The Task Force on Climate-Related Financial Disclosures was created by the Financial Stability Board to improve and increase reporting of climate-related financial information. The UK Government announced at the end of 2021 that it would enshrine TCFD in law for large companies. From April 6, more than 1,300 of the largest UK-registered firms and financial institutions will be mandated to disclose climate-related financial information. This will affect some of the UK’s largest traded companies, banks and insurers, as well as private companies with more than 500 employees and £500 million in turnover. Regarding another ESG area of focus for Amundi Technology, Lesage says: “The third area is around the impact of climate and the new types of impacts such as biodiversity. We have created a new product called ALTO Sustainability which will expand to cover all the needs that will come, for asset managers, financial institutions, banks. It is clearly

one the main technological evolutions of the next years.” As part of Amundi Technology’s wider strategy, it wants revenue of €150 million (£126 million) by 2025 and Lesage says that the asset manager is on track with this goal. In terms of its approach, the business line targets the whole savings industry with technological cloud solutions, complemented with best-ofclass services. Amundi Technology announced on March 7 that US custody giant BNY Mellon had selected the firm and its Amundi Leading Technologies & Operations (ALTO) platform for trustee controls and compliance monitoring. Lesage adds: “At the end of 2020, we created a new offer for asset servicing, with a tool for trusted control. We first sold it to CACEIS, then we expanded with Societe Generale Securities Services and now BNY Mellon. This is exactly aligned with my strategic objectives: we launch a new product and then we expand to more clients and go progressively bigger and bigger.” Amundi has said it is targeting larger clients in 2022. “Last year we signed with two major French asset managers, AG2R for €120 billion and Malakoff Humanis for €50 billion. We also signed with Bank Austria for discretionary portfolio management, we’ve just signed with a private bank in France, and we have equipped LCL with an advisory solution for all of its retail and wealth banking,” comments Lesage. Amundi Technology also has two insurance clients; one is Credit Agricole Assurances and the second is a French company called Agrica. The asset manager’s technology arm gained 15 new clients in 2021, which represents a 60% increase compared to the previous year.

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ASSET MANAGEMENT

ESG – AMY DOMINI

ESG ‘here to stay’ as the new investment theory – Domini Environmental, social and governance (ESG) is the modern generation’s investment philosophy, according to impact investing pioneer Amy Domini. The founder and chief executive officer of Domini Impact Investments said new investment philosophies emerge about once in a generation, citing Benjamin Graham’s Intelligent Investor, the original value investing text, published in 1949 and modern portfolio theory, which earned its founder Harry Markowitz the Nobel Prize for Economics in 1990. Domini said: “Here we are 50 years later with ESG. In my opinion it is so valuable to the investment advisory field and adds a complex richness for the individuals who are selecting stocks. It also has this tangible benefit to the public, so I believe ESG is going to be the next major investment theory. It’s a tool we will never give up, just like we wouldn’t get rid of modern portfolio theory or value investing,” adds Domini. ESG is “here to stay” for a few reasons, according to Domini. The first is that ESG is affecting outcomes. It is affecting corporate behaviour in a beneficial way and it is encouraging a greener economy. Domini says that it is also encouraging more concern over how the lives of people are affected by corporate behaviour. In Domini’s words: “It has also given investment advisors a new toolkit that they didn’t realise was at their fingertips.”

Spring 2022

Domini tells Global Investor that, from an ESG perspective, she has seen organisations become far more sophisticated. “The individuals who choose to join this group are selfselecting and carry their own agenda and commitment level – overall this is positive. ESG is all about the fact that if we are going to have a liveable planet and lives worth living, we need to have investors involved in that process. We cannot be fighting the investment process whilst doing it – and ESG is inviting investors to be part of the solution.” The ESG market leader played a crucial role in the Securities and Exchange Commission (SEC) adopting a rule in 2003 to require mutual funds and investment advisors to disclose their proxy voting policies and voting records. Domini’s firm filed a petition in 2003 to mandate these requirements. “In the past, we had two or three very large portfolio managers in the United States, where their CEOs talked a lot about ESG but then who voted their proxies against environmental initiatives or against human rights initiatives. That has suddenly changed because we now have legislations that mandates that they must reveal how they vote in their proxies. “This information is being published

Amy Domini, founder and chief executive officer of Domini Impact Investments immediately after meetings and so there is a lot of examinations, and the humiliation factor is huge here,” comments Domini. In 2005, Domini was named one of Time magazine’s 100 Most Influential People. She believes social factors under ESG will take the spotlight during this year’s proxy season, which mainly takes place in the spring across April, May and June. Furthermore, transparency will drive changes in proxy voting. Increased shareholder and media scrutiny of asset managers’ voting records, for which the industry can partly thank Domini, will only serve to promote further the ESG agenda.

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GREEN TAXONOMY

Ukraine crisis challenges EU Taxonomy stance on natural gas, nuclear power Russia’s invasion of Ukraine has forced some investors to question further the European Union Taxonomy’s inclusion of natural gas, an already controversial decision that has divided opinion. The European Commission outlined at the start of this year an amendment to the Green Taxonomy that allowed the inclusion of natural gas and nuclear energy. The consensus at the time was that, while natural gas is not a sustainable source of energy, it is less damaging than oil or coal so gas could play a key role in enabling the transition to net zero. Rick Lacaille, executive vice president, head of environmental, social and governance (ESG) at State Street, backed the inclusion of natural gas and nuclear energy in the EU Taxonomy. He said: “If you look inside Europe such as Poland or Germany, or outside Europe such as South Africa which relies on coal for more than 75% of its electricity, it would not make sense to turn off coal. The question is could they get off coal more rapidly if they have intermediate solutions? Some would argue that they can’t and that they should go straight to renewable energy. However, there is a case that you allow gas on a limited basis to substitute what is twice as bad in order to get to a better point.” David Morrison, senior market analyst at Trade Nation, agrees with Lacaille, adding: “I think it makes complete and utter sense to natural gas and nuclear energy in the EU Taxonomy.” Will Wilson, ESG assistant vice president, climate lead at Apex Group, added: “The inclusion of gas and nuclear is highly controversial and I

Spring 2022

personally don’t see how these could be viewed as sustainable. I completely understand where they’re coming from, it’s viewed as a transition. For example, Poland is very dependent on coal, so they were looking to transition to gas first and then renewables. However, with the situation in Ukraine they’re now probably going to extend their usage of coal and then go directly to renewables to de-risk themselves from Russia.” The European Union, notably Germany, is heavily reliant on Russian natural gas but has in recent weeks promised to reduce its reliance on gas from Russia, meaning Europe may have to find alternative sources. Cedric Merle, head of the Centre of Expertise & Innovation at Natixis CIB’s Green & Sustainable Hub, believes the inclusion of natural gas in the EU Taxonomy may become obsolete because the carbon footprint associated with the transportation of liquefied natural gas from far-flung countries such as the United States, Algeria and the United Arab Emirates is problematic. Morrison said: “Most of the natural gas comes from Russia and if we take it elsewhere then the carbon footprint would increase. There are other potential gas fields that are closer to Europe but it’s not straightforward and we have to consider where we are with Russia. We currently have sanctions on Russia, but things could move very quickly.” Another blindspot noted by Merle

is that there is a ‘do not significantly harm’ criterion in the EU Taxonomy and social minimum safeguards, which relates to human rights, freedoms and international norms. The current criteria are only assessed at the activity level by the company performing the activities and thus, the supply of critical materials or inputs is not part of these assessments. “We are seeing the debate slightly evolving with Russia’s invasion. Some observers are now wondering if even with the most efficient gas plants, one can be violating the social minimum safeguards by importing raw materials from a Rogue State such as Russia? This does not only apply to Russia, but I think that will also be part of the big picture,” added Merle. David Hunter, co-founder and chief investment officer of Renewity, believes the Ukraine crisis has demonstrated the risks associated with a country being heavily dependent on a single thirdparty to deliver an essential resource. Hunter said: “We expect the current situation to accelerate a shift whereby no government in Europe will build long-term dependency on a foreign power anymore unless they are extremely confident that that country is aligned with them on a long-term basis. The current geopolitical crisis has shaken the grounding on which long term planning for importing energy was built, and, to some extent, will remove the confidence that nations will have in outsourcing or importing energy.”

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DERIVATIVES CUSTODY

EXECUTIVE FEATURE: NICOLAS AGUZIN, HKEX

The increase in prices that we saw in the Nickel market on March 7 and March 8 were unprecedented and there was a lot of debate around the decisions taken at that time

Spring 2022

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HKEX chief Aguzin reflects on LME nickel, other strategic opportunities There are few chief execs who can claim to have had a first year quite like Nicolas Aguzin’s at Hong Kong Exchanges and Clearing.

Spring 2022

By Luke Jeffs The former head of JP Morgan’s International Private Bank took the reins at the Hong Kong exchange group on May 24 last year and wasted no time in stressing he wants HKEX to maintain its strong links with mainland China. Aguzin signed in August a partnership with Guangzhou Futures Exchange, investing RMB 210 million (£23.7m) in the new Chinese market. The CEO further backed up his pledge by launching in October HKEX’s first China A shares future, pitching the Hong Kong market into direct competition with Singapore Exchange’s popular Chinese contract. But the focus switched to Europe in January when the HKEX-owned London Metal Exchange said its chief executive of five years Matthew Chamberlain was leaving the firm at the end of April, to become head of Komainu, a digital asset custodian backed by Nomura.

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DERIVATIVES

NICOLAS AGUZIN, HKEX

DERIVATIVES CUSTODY

EXECUTIVE FEATURE: NICOLAS AGUZIN, HKEX

After nine months, Aguzin’s tenure (barring the Chamberlain resignation) was going according to plan. Then the LME closed its nickel market. In the early hours of March 8, the price of a tonne of nickel more than doubled to break $100,000 (£76,200) for the first time in history and the LME decided to stop nickel trading at 0815 GMT, citing “orderly market grounds”. The LME also retrospectively cancelled all nickel trades executed after midnight on Tuesday March 8, a move which angered some traders. The LME nickel market was then closed for six days before re-opening as planned on March 16 but the metal contract traded for just 90 seconds before a limit down buffer was triggered and trading was again suspended. The LME suffered a further setback on March 16 when its electronic trading plat-

form allowed “a small number of trades to be executed below this lower daily price limit”. Trading resumed later on March 16 but the normal open on March 17 was delayed by 45 minutes after the exchange matched trades before the market open, which is not allowed. The nickel market slowly returned to normal trading in the days after that, but the focus quickly turned to the longer term implications of the nickel disruption for the LME. On April 4, the LME said it had launched an independent review of the events that led to the suspension of the nickel market. On the same day, the exchange welcomed the news that the Bank of England, the UK Prudential Regulation Authority and the Financial Conduct Authority

rounding the decision to suspend the market and cancel some trades. The LME nickel trading saga took another unexpected twist when the LME said on April 27 that Chamberlain was not leaving the firm after all, and would instead remain as permanent CEO. Aguzin said at the time: “I am very excited Matt Chamberlain is going to stay with us. Matt is a first-class professional, very well trusted by the board of LME and has their full support.” Speaking to Global Investor in late April, Aguzin was quick to stress that the circumstances facing the LME in early March were highly unusual. The HKEX chief said: “The increase in prices that we saw in the Nickel market on March 7 and March 8 were unprecedented and there was a lot of debate around the decisions taken at that time.

were reviewing the circumstances sur-

HKEX Revenue and Other Income

“The LME’s decision to suspend

HKEX Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). Source: HKEX Annual Report 2021

Source: HKEX Annual Report 2021

Revenue Revenue andand Other Other Income Income

EBITDA EBITDA

+9% +9%

+11% +11%

$m $m

$20,950 $20,950million million $16,269 $16,269million million 21000 21000 21000 21000 16800 16800 16800 16800

20,950 20,950 20,950 20,950 19,190 19,190 19,190 19,190 16,311 16,311 15,867 15,867 16,311 16,311 15,867 15,867 13,180 13,180

12600 12600 13,180 13,180 12600 12600

13600 13600 13600 13600 10200 10200 10200 10200

84008400 84008400

68006800 68006800

42004200 42004200

34003400 34003400

0 0

2017201720182018201920192020202020212021 2017201720182018201920192020202020212021

Spring 2022

16,269 16,269

17000 17000 17000 17000

0 0

16,269 16,269 14,641 14,641 14,641 14,641 12,263 12,263 11,757 11,757 12,263 12,263 11,757 11,757 9,6149,614 9,6149,614

2017201720182018201920192020202020212021 2017201720182018201920192020202020212021

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EXECUTIVE FEATURE: NICOLAS AGUZIN, HKEX

EBITDA EBITDA

$20,950 $20,950million million $16,269 $16,269million million

trading and cancel executed trades was counter (OTC) segment has on the wider to improve the market infrastructure goin part due to the LME’s conclusion that LME market. ing forward. We want to make sure we the significant price movements during Aguzin said: “When you look at some develop a market where we can build early hours trading activity on March 8 of the historical actions that the LME long-term confidence.” had created a systemic risk to the market, tried to take with respect to understandAs the market awaits the publication including in relation to margin calls, ing OTC positions and getting additional of the reports from the LME itself and the $m $m $m $m which if LME had not acted would have visibility on the positions of market parUK regulators, there is only so much Agu20,950 20,950 closed at levels far in excess of those ever ticipants, there was always a pushback zin can say on the matter but he was keen 16,269 16,269 2100021000 1700017000 20,950 20,950 19,190 experienced in the LME market.” 19,190 around that. to stress his support for the exchange. 16,269 16,269 2100021000 17000 17000 14,641 Aguzin added: “There were serious “LME has14,641 a great history, some 145 19,190 19,190“I think this is a really important time 16,311 16,311 14,641 concerns about the ability of market parto assess the market structure. We are years of history, it14,641 is a great institution 15,867 15,867 1680016800 1360013600 12,263 12,263 ticipants across the board16,311 to meet their undertaking an independent review of and we want to see it succeed. 11,75711,757 15,867 15,867 16,311 1680016800 1360013600 12,263 12,263 13,180 13,180calls, raising the sigresulting margin the broader events that took place during He added: “We are focused on rebuild11,75711,757 9,614 9,614 nificant risk of multiple defaults and a that time that led up to the suspension of ing trust in the long term, and this will 1260012600 13,18013,180 1020010200 9,614 9,614 reduced ability for market participants to the market. We also fully support the efdepend on the actions that we take. This 1260012600 1020010200 continue to access the market and manforts by the FCA and the Bank of England could be an opportunity to make the LME 8400age 8400 6800 6800 their price risk. At all times, the LME which are conducting separate reviews. an even better market with more liquid8400and 8400 6800 6800 LME Clear sought to act in the interWe think this is going to be very helpful ity, more participation and better condiests of the market as a whole.” for the market.” tions. I think this provides the opportu4200 4200 3400 3400 The LME said in early April, when it He continued: “As a shareholder, nity to assess what happened and then 4200launched 4200 3400 its investigation, it would look HKEX is supportive of3400 evaluating in depresent the best advice in terms of how to

+9% +9%

+11% +11%

at the effect that the over-thetail what happened and what can be done do things better.” 0specifically 0 0 0 2017 2017 2018 20182019 20192020 2020 2021 2021 2017 20172018 2018 2019 20192020 2020 2021 2021 0 0 0 0

2017 2017 2018 20182019 20192020 2020 2021 2021

2017 20172018 2018 2019 20192020 2020 2021 2021

Profit Attributable to Shareholders

Basic Earnings Per Share

Source: HKEX Annual Report 2021

Profit Profit Attributable Attributable to Shareholders to Shareholders

Basic Basic Earnings Earnings Per Per Share Share

+9% +9%

$12,535 $12,535million million $9.91 $9.91 $m

12,535 12,535

9.91 9.91

10 10

8 8

7800 7800 7800 7800 7,4047,404

6 6

5200 5200 5200 5200

4 4

2600 2600 2600 2600

2 2

0 0

0 2017 2017 2018 20182019 2019 2020 2020 2021 2021 0

1300013000 1300013000 1040010400 1040010400

11,505 11,505 12,535 12,535 11,505 11,505 9,3919,391 9,3129,312 9,3919,391 9,3129,312 7,4047,404

0 2017 2017 2018 2018 2019 2019 2020 2020 2021 2021 0

2017 2017 2018 2018 2019 2019 2020 2020 2021 2021

Spring 2022

9.11 9.119.91 9.91 9.11 9.11 7.50 7.507.49 7.49 7.50 7.507.49 7.49 6.03 6.03 6.03 6.03

2017 2017 2018 20182019 2019 2020 2020 2021 2021

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DERIVATIVES

Revenue Revenue andand Other Other Income Income

DERIVATIVES CUSTODY

EXECUTIVE FEATURE: NICOLAS AGUZIN, HKEX

end-to-end processes to ensure that we develop a target operating model consistent with what we want to do, namely building the Marketplace of the Future. “In addition to that, over the last few months, we have reorganised our business to focus more on our clients. We now have a unified sales and marketing team, and we have rearranged our business so we can achieve greater operational excellence. We have also established a new team to look at emerging business opportunities. “To ensure we could deliver these changes, this transformation, we needed to make sure that we have a strong risk and control framework and infrastructure so we have made a lot of investments in our second and third lines of defence but we have also solidified our first line control framework.”

Aguzin: “it’s not just the case of maintaining a solid infrastructure and reliable systems, you also have to understand what the client needs.”

Stepping back from the recent LME problems, Aguzin has identified his strategic priorities for HKEX, some of which seek to build upon the achievements of his predecessor Charles Li. “I have been CEO for eleven months and it has been a special time in terms of the environment that we are living in. I remain as convinced as ever that HKEX is a unique company that plays a vital role as a core infrastructure of Hong Kong. “Not only is it one of the world’s largest and most respected exchanges, HKEX also has a great purpose. I am proud of the people and the team we have assembled as we work to achieve the further internationalisation of China’s capital markets and Hong Kong’s development as an international financial centre,” Aguzin said. The launch of the MSCI China A 50 is part of the group’s broader strategy for China (more on this later) while a change

Spring 2022

to the exchange opening hours to enable trading during Hong Kong public holidays is the group’s latest move to attract more international participation. Aguzin said: “Since joining the company, we have already seen the launch of a great product in the MSCI China A 50 Connect Index Futures, we’ve launched SPACs and we’ve been addressing issues that have been for a long time preventing us from being as competitive as we could be, such as the ability to trade derivatives products during the holidays. This programme launches on May 9.” New developments such as the China A 50 Connect future and the ability to trade on Hong Kong public holidays may have grabbed the headlines but there are equally important initiatives behind the scenes, the chief executive said. “We have also launched a project to look deeply into our structure and our

Aguzin said these various initiatives feed into a broader objective “to shift from being an infrastructure-led business to become a client-led organisation,” a move that “is going to be critical to our future”. In an industry enjoying rapid technological innovation, exchanges need to work harder (see box on technology innovation) to keep up, Aguzin said. “As the world evolves and we want to be a player not only in Hong Kong but in all of Asia and around the world, that means you have to adapt to become faster, better, more efficient and more focused on the clients’ needs. “When you combine that with the fact there are new models emerging in the world, such as the way some of the new crypto exchanges operate and the application of DeFi, there is a lot to learn from these players. So you have to look at what is going on such as the disruption from digital innovation, artificial intelligence and blockchain, and ask: How do I adapt to these trends? He added: “The reality is that everything points to the fact that you have to be more aware of what the client needs and you have to accelerate the implementation of certain things. So it’s not just the case of maintaining a solid infrastructure and reliable systems, you also have to understand what the client needs.”

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The focus on clients, both local and international, resonates with the group’s strategic objectives “The previous strategy was right for its time but you have to open your eyes to the transformation that is happening out there as a result of the development of technology and that capital investments are flowing all over the place, especially if you want to be the super-connector of the world. “When setting up our strategy, we focused on three key pillars. Our historical strategy was to be China-Anchored, Globally Connected and Technology Empowered, whereas now we are developing the connect theme with: Connecting China and the World, Connecting Capital with Opportunities and Connecting Today with Tomorrow.” Aguzin said: “Our vision is to connect

East and West. If we are to do this, we need to be the best that we can for our clients.” As the key centre offering international access to the vast and expanding Chinese mainland market, Aguzin’s HKEX strategy includes developing the exchange’s strong relationship with China. The chief executive said: “The logic of Connecting China with the World is simple. We have a unique position: we are the most international city of China and the most Chinese City outside of the mainland. No one can replicate that. We are a place where there is the free flow of capital and the free flow of information. The infrastructure has been set up for decades to address the needs of international investors, so we have a robust and trusted infrastructure, while the tax regime of Hong Kong is one of the best in the world.” The Chinese economy has slowed in recent months, largely due to ongoing Covid lockdowns on the mainland, but the long-term fundamentals are strong. Aguzin said: “We are in a great position and then combine that with the fact that the Chinese markets are going to see incredible growth in the next ten years. Right now, the Chinese capital markets are worth about $30 trillion. If you do some simple calculations around

The role of technology innovation

LME chief executive Matthew Chamberlain’s (pictured, left) proposed move to Nomurabacked digital asset custodian Komainu would have been just another example of a senior figure leaving the traditional markets for the fast-evolving digital asset trading world. The advent of these businesses poses some serious and interesting questions for established market infrastructure providers like HKEX and LME. Aguzin said: “The rise of digital markets and new technologies present huge opportunities to review our operating model to serve clients better. As traditional exchanges, we have the volume but if we don’t take advantage of that and learn from that, the challenge is that, yes, people will go to whoever provides the best service. “The first challenge is that we operate with a legacy infrastructure that needs to be adjusted and another challenge is that the mindset is different which links back to us moving from an infrastructure-led organisation to a client-led organisation. That process is not easy.” In his nearly 12 months in charge of HKEX, the chief executive has embarked on a fundamental review of the main processes on which the exchange relies. The CEO said: “We have been working for a few months now on a new target operating model across the whole firm. It is a foundational review of everything we do, an assessment of how we operate, how we are organised, how we make decisions, what people we have and how we measure performance.” Aguzin added: “The hand that we have been dealt is a really good one. We operate in a great location, we have great people, we have a great platform, we have the clients and we have the products. Now we have to make sure that we are alert to evolving changes in the world and we can take advantage of those opportunities. This is not an easy task, it is a multi-year process where we will have to be courageous and we will need to present the best of us to ensure that this is done well.”

debt capital markets and equity capital

Spring 2022

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DERIVATIVES

EXECUTIVE FEATURE: NICOLAS AGUZIN, HKEX

DERIVATIVES CUSTODY

EXECUTIVE FEATURE: NICOLAS AGUZIN, HKEX

Our historical strategy was to be China-Anchored, Globally Connected and Technology Empowered, whereas now we are developing the connect theme with: Connecting China and the World, Connecting Capital with Opportunities

markets as a percentage of GDP, it will get to $100 trillion in the next decade or so. It is possible I will get it wrong over one or two years, but it is unlikely that I will get it wrong over 10-15 years. “From $30tn to $100tn, you can see how massive that is and that does not include the flow of capital in and out of Mainland China. Today, international investments in China are small. Only about 4% of Chinese capital market assets are owned by international investors, while all the rest is local. Similarly, international investments by Chinese investors are also about 4% or 5%, so the world is massively under-invested in China and Chinese investors are under-invested in the world.” Aguzin believes that international participation in the mainland Chinese economy will also grow quickly in the coming years, citing the example of the Connect trading programme which links the Hong Kong exchange to its mainland Chinese counterparts, enabling international firms to trade Chinese shares and Chinese in-

Spring 2022

vestors to access HKEX listed names. The CEO added: “When you are right next to a market that is going to grow from $30tn to $100tn over the next ten years, you have a unique advantage and you better play that card because that is your winning card. Logically, that has been the way we have approached it.” Aguzin continued: “So what are we going to do? We have today something that has been built over eight years which is the Connect programme that offers the ability to connect assets in Hong Kong and the Mainland in a single liquidity pool. The Connect programme today has a certain amount of instruments and is available to certain number of investors. “So we have to do three things: increase the number of products available through Connect, increase the number of investors that can participate in Connect, and enhance the operating structure of Connect, that is to allow for certain things to happen more efficiently. If you look at the Connect programme, today you can

trade stocks but you can’t trade ETFs so let’s include ETFs.” HKEX reached on December 24 last year agreement with Shanghai Stock Exchange, Shenzhen Stock Exchange and the China Securities Depository and Clearing Corporation to include ETFs in Stock Connect. The partners said at the time: “It is estimated that the preparation work will take approximately six months to complete.” Aguzin continued: “Number two, we need to be the Go-To market for offshore Chinese risk management, and that is where things like the MSCI A 50 Connect Futures come into play. Anyone around the world who wants to hedge their positions, to transact in Renminbi or other currencies, we want them to come to Hong Kong. We want to be the risk management centre for anything related to

China, and, similarly, we want to be the Go-To centre for Chinese investors looking internationally.” The HKEX MSCI China A 50 Connect futures contract has made a strong start. Some six months after launch, it traded over 500,000 lots in March this year, according to data from the exchange, which makes that product HKEX’s fifth most popular futures contract. Aguzin said: “Next, we need to continue being a preferred offshore capital raising centre for Chinese companies so we need to make sure our systems, rules and regime are fit-for-purpose to attract companies that want to expand. “We also want to grow our portfolio of China-related products and that is where carbon, ESG and digital assets could come into play as well as fixed income, currencies and commodities, where we can leverage our strength with the LME to do more in this space.” Asked if the Connect programme might one day support listed derivatives, Aguzin said ETFs are the next step and they could help pave the way for futures and options. “Futures would be interesting at some point for international investors to invest in the Mainland, and, conversely, there could be benefit in trying to invest in some of our products. We are not there

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yet. This requires co-ordinating with a lot of stakeholders. Investing in ETF products is a step in the right direction but, at some point, the ability to trade futures and options would be attractive.” A more immediate opportunity for HKEX is positioning itself to support and benefit from the increased demand for sustainable, environmental, social and governance (ESG) products. Aguzin said: “The ability to leverage our location, the investment infrastructure that we have made, the trust from global investors in the Hong Kong market and HKEX – you put all that together, and then you look at China, which will need a significant amount of ESG-related investments the next few years, and, so obviously there is going to be a lot of activity, and on top of that, China is the largest emitter of carbon in the world so

China, to explore co-operation in tackling climate change and promoting sustainability. This is mostly focused around the voluntary carbon market. We are also working very closely with the regulators in Hong Kong and other stakeholders in the region.” Aguzin said his firm’s key area of focus in the near term is the Greater Bay Area, which comprises about 86 million people producing nearly $2tn of GDP. “It is a policy priority for China to ensure that they develop and internationalise this region,” he said. The HKEX chief added: “Of course, we are doing lots of things ourselves on the regulatory front such as promoting disclosure requirements and we are trying to define the appropriate international regime in terms of disclosure that will be applied to all the companies that want to

change, the largest emissions exchange in

Group.

the market is big enough.” He added: “There is a lot of effort around trying to co-ordinate standards around the world and we have a special role to play in that as a company that can operate in multiple jurisdictions and trying to address the interests of different players.” HKEX said in November 2021 it was preparing a detailed action plan to meet its net zero target before 2050 as the exchange signed up to various initiatives at the UN Climate Change Conference (COP26) in Glasgow, Scotland. Closer to home, HKEX sees itself playing a key role in the evolution of sustainable practices in mainland China. “Today the markets of China and the world are quite separate. Trying to bring them together and achieve something that is important for China, which is carbon neutrality as soon as possible, is critical.” Aguzin said: “We have done a few things in this respect. We have invested in the Guangzhou Futures Exchange. They want to innovate and are focused around green developments, and we have signed an MOU with them. We have not announced any products yet but, clearly, part of the focus is on areas where we can co-operate. “Just a few weeks ago, we signed another MOU with China Emissions Ex-

Spring 2022

list on our markets. “We also have a platform called STAGE, which is our Sustainable and Green Exchange, where people can list all of the sustainable products that they have such as green bonds so investors and issuers have a place where they can find all these green initiatives. There are other things that we are doing with our digital platform and we feel that we can play a very important role.” The LME said in October last year that nine large metals producers, including Anglo American and RUSAL, had pledged to provide regular sustainability disclosures on a digital reporting service launched by the exchange in August. Aguzin has focused in his first year on making Hong Kong Exchanges and Clearing more efficient while cementing its status as the international gateway to China. The increasing demand for ESG products and solutions as well as innovations in technology present further opportunities. The LME nickel disruptions were unwelcome but Aguzin has been unwavering in his support for the LME and its chief executive. Now Chamberlain is staying, Aguzin has one less thing to worry about as he seeks to minimise the damage from that episode and forge ahead with his strategy for the LME and HKEX

Nicolas Aguzin joined HKEX as Chief Executive Officer on May 24 2021 from JP Morgan, where he was most recently chief executive officer of JP Morgan’s International Private Bank. Aguzin has been based in Hong Kong since 2012. From 2013 to 2020, Aguzin was CEO, JP Morgan, Asia Pacific where he was responsible for all the firm’s business across 17 markets. Aguzin presided over some of the firm’s major expansion efforts during the period, including establishing itself in China as one of the few international financial institutions with a full range of services and capabilities; including a fully-owned locally incorporated commercial bank, a majorityowned securities company, an asset management company and a futures and options company. Concurrent with his Asia CEO role, Aguzin also ran JP Morgan’s Investment Banking division in Asia. During his tenure the bank rose to become one of the leading investment banks in the Asia Pacific region. Aguzin joined JP Morgan in 1990 in Buenos Aires as a financial analyst. Between 1990 and 2005, he held a variety of roles in New York and Buenos Aires, and in 2005 he was appointed as CEO, Latin America. In 2008 and 2009, in addition to his responsibilities as CEO, Latin America and head of Latin America Investment Banking, he served as senior country officer for Brazil. Aguzin holds a bachelor degree in Economics from the Wharton School of the University of Pennsylvania in the US and is fluent in Spanish, Portuguese and English.

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DERIVATIVES

EXECUTIVE FEATURE: NICOLAS AGUZIN, HKEX

DERIVATIVES CUSTODY

THOUGHT LEADERSHIP: BPI FINANCIAL GROUP

Beyond Asia and Iron Ore BPI tells FOW how it is extending its services to Europe with a new multi commodity services platform. BPI Financial Group Limited (BPI) is an Asia based firm and part of Theme International Holdings Limited which is listed on the Hong Kong Stock Exchange. BPI is licenced in both Hong Kong and Singapore by the Securities and Futures Commission (SFC) and the Monetary Authority of Singapore (MAS), respectively to operate listed derivatives business comprising of market access, clearing, interdealer brokering and contracts-for-differences (CFD). BPI clears one in every four SGX iron ore trade Since commencement of business in early 2018, with bulk commodities

comprising of iron ore and steel as its anchor products, BPI has registered remarkable growth. With deliberate efforts in bringing together institutional participation comprising of hedgers, market makers, proprietary trading groups and algo traders, BPI takes pride in its significant market footprint whereby it clears nearly one in every four-iron ore derivative trades on the Singapore Exchange (SGX). Even though iron ore derivatives were listed on the SGX nearly 12-years ago, it is largely a phonebased market, with only about 15% to 20% of trades being matched electronically with the rest being

Bridging access to both onshore and offshore iron ore products BPI’s compelling strength lies in being able to offer both interdealer brokerage services combined with clearing in addition to providing access to Dalian’s internationalised iron ore contract which represents domestic Chinese ore prices. The ability for customers to seamlessly benefit from price discovery in OTC markets to electronic trading access to both onshore and offshore iron ore products is what BPI refers to as a one-stop platform which anchors their core strategy. Expanding the pie by product and geographic diversification “One of the firm’s defining ethos has been to grow the market instead of resorting to mere market share capture,” says Kenny Mah, CEO of BPI. He further adds that “We have purposefully engaged segments within the industry that previously did not actively hedge using derivatives. Education and handholding them into the market place has helped BPI get to its current standing.” In recent years BPI has implemented an intentioned strategy to grow and diversify its business beyond iron ore to cover freight and the energy product suite. In line with that strategic intent, BPI has hired new team members in Singapore, China and Europe to facilitate expanding product offering.

Kenny Mah, Chief Executive Officer of BPI

Spring 2022

matched via voice brokered trades. BPI offers interdealer brokerage service facilitating price discovery in OTC iron ore markets. BPI team of derivatives and physical commodity brokers are based out of Singapore, China, London and Norway.

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Dominant 90% market share in Asian coal derivatives Connecting sellers to buyers in China, India and the rest of Asia, BPI commands 90% of trades brokered for Indonesian coal derivatives. Building on that dominant position in Asia, BPI is establishing presence in western markets. Historically, trade in major coal contracts such as API2, API4 and Newcastle Coal Futures have been dominated by European counterparts. To service them better, BPI has now established presence in UK and expanded its team there with four senior hires who collectively bring years of rich and deep industry experience in furthering BPI’s offering to cover physical coal brokering in addition to coal derivatives. BPI ranks #1 among 75 global overseas intermediaries Growing beyond, bulk commodities, base and precious metals, BPI has a sizeable clearing business in energy contracts on ICE and CME as well as internationalised products on Shanghai Future Exchange’s International Energy Exchange (INE). As part of its one-stop platform strategy, BPI extends offshore participants access into China to the internationalised derivatives contracts. To this end, BPI is the top Overseas Intermediary (OI), standing first among 75 global OIs of INE crude oil futures according to 2021 rankings recently published by Shanghai Futures Exchange. Speaking of alternative energy, BPI’s chief commercial officer Fan Songhua, says: “[we are] partnering with our clients to aid the process of transition to sustainable energy. While the market for such alternative energy contracts is still in its infancy, we are seeing rising interest in hydrogen and carbon credits. These markets look likely to grow rapidly in the coming years; as companies shift towards green energy, we are in a position to facilitate their journey, riding the energy transformation wave.”

Spring 2022

Fan Songhua, Chief Commercial Officer of BPI

One-stop shop strategy distinctively positions BPI BPI’s differentiated positioning in Asia allows it to meaningfully match western trade flows against its Asian flows.

The success of this model is vindicated by its growing customer funds, which currently exceeds $600m which has been accomplished within a short space of four years. Besides the size of these flows, Mah explains what distinguishes BPI is its integrated service model: ”Today, organisation of firms in our sector is typically highly silo’d – with most active only in clearing or only in execution.

“Many a times, this is not an ideal fit for traders’ needs: when a client seeks execution for a trade, the process will also create the requirement for risk management, financing, clearing, and brokerage.” He further adds that: “Our distinctive value-add is to provide all these services on a unified platform - which we refer to as a one-stop shop strategy - by combining OTC

inter dealer brokering, trading access to global and emerging markets, clearing of listed derivatives & internationalised contracts, and facilitation of physical commodity trades. Price discovery, market access, instant clearing confirmation and collateral management – this integrated one stop shop platform meets all those needs, regardless of the market in which our clients operate.” Describing the benefits of its one-stop strategy, Songhua further adds that: “Our integrated approach removes inefficiencies – in terms of time and money – entailed by the type of distributed service provision that comes when clients have to use several different firms. It remains our guiding strategy as we seek to expand our capabilities in trading and risk management to new asset classes, including crypto currencies, other digital assets and equities. Regardless of where an investor is looking to source alpha, our aim is to provide seamless access via a single platform.”

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DERIVATIVES

THOUGHT LEADERSHIP: BPI FINANCIAL GROUP

DERIVATIVES CUSTODY

ISDA

ISDA looks to harness winds of change amid swaps reform Severe market volatility and geopolitical events have disrupted global regulators’ efforts to reform the infrastructure that underpins derivatives markets but the regulators continue to roll out updated frameworks to govern the clearing infrastructure that supports trading. By Radi Khasawneh The International Swaps and Derivatives Association (ISDA) has been an active participant in a swathe of consultations focused on updating the plumbing of those markets, representing the interests of its wide community of members. Those interests span the largest swap dealers, clearing counterparties and their members, as well as smaller firms and corporate hedgers. At the sidelines of ISDA’s AGM in Madrid in May, Global Investor caught up with the New York-based trade association’s head of clearing services Ulrich Karl and head of European public policy Roger Cogan to assess the progress being made across a series of fronts as markets look ahead to a transformative period. In the most observable change in the last few years, swap markets have been dealing with the structural shifts that flowed from the UK decision to exit the EU in June 2016. At the end of last year, the European Commissioner of financial

services proposed an extension of the UK’s temporary equivalence for clearing within the European Union ahead of the June 2022 deadline for recognition. Commissioner Mairead McGuinness has since said that this extension, running to 2025 will be the last. European regulators are also trying to encourage adoption of European central clearing counterparties (CCPs) in euro denominated swaps. The most affected derivatives have been the largest market – interest rate swaps. While the market share for European venues has grown, data from OSTTRA published in May showed European venue market share in that market at a post-Brexit low, at the expense of US venues. “It is true that the post-Brexit landscape has created an element of fragmentation in the global swaps markets,” Cogan said. “It is a less efficient way of doing business if EU and UK firms can’t deal with each other in swaps that are subject to the EU trading obligation. They have to go somewhere else – for

We do not believe there is a financial stability risk for the EU from clearing in the UK, and certainly the US is not concerned that more than 90% of dollar interest rate swaps are cleared in London. Ulrich Karl, head of clearing services, ISDA

Spring 2022

example, in a US venue – in order to interact.” ISDA adheres to the principle of free, global derivatives markets, and Karl sees no obvious market risk that stems from the location of a clearing house. “We do not believe there is a financial stability risk for the EU from clearing in the UK, and certainly the US is not concerned that more than 90% of dollar interest rate swaps are cleared in London,” Karl said. The European Securities and Markets Authority in December conducted an assessment of “Tier 2” CCPs, opting not to derecognise the main UK-based clearing houses but asking for more powers over recovery and resolution plans, and seeking to take further measures aimed at diversifying clearing risk for European entities. “Some targeted changes could improve financial stability from a European point of view, such as consulting ESMA when drafting recovery and resolution plans for tier-2 CCPs,” Karl said. “These powers should, however, not hamper the ability of the Bank of England to deal with a crisis, as similar powers in the other direction should not hamper European authorities to deal with a crisis at a European CCP.” For Cogan, there is still a need to grant permanent equivalence, as well as make changes to the transparency requirements under Europe’s Markets in Financial Instruments Regulation (MIFIR) as currently drafted.

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“The most obvious solution is to grant equivalence and make the EU MIFIR framework more competitively minded,” he added. “That could be achieved by looking at the trading obligation and seeing whether that is the best way of ensuring transparency and clear price formation in derivatives markets, or if there are other ways to achieve that aim.” Transparency rules under MIFIR have hit the spotlight since ESMA in March published its assessment of the European Commission MiFIR proposals, making changes to help the development of a consolidated tape across asset classes. The project, which has stalled since the regulation came into effect, has had issues in persuading firms to step up and take on the burden of becoming the officially sanctioned provider. The decision to stagger implementation, and de-emphasise the derivatives consolidated tape in Europe has been welcomed by many in the industry, who questioned the use case for the plan within the fragmented derivatives landscape. “I don’t think a post-trade consolidated tape for derivatives, as currently drafted in the EC proposal, is viable,” Cogan said. “It seems to us that a posttrade consolidated tape with the current scope – covering derivatives subject to the clearing obligation – does not have user appetite, and no impact assessment has been done.” In general, the provisions embedded within the overall transparency framework – including plans to remove size specific to the instrument (SSTI) thresholds that significantly widen the universe of affected derivatives - open the door to a possible loss of competitive position for the European jurisdiction. “Another issue we see regarding the wider pre-trade framework as it exists in the first French Presidency compromise text is that the removal of SSTI thresholds – significantly widening the universe of affected instruments – is still being contemplated,” Cogan said. “Something needs to be changed in the MIFIR text if the EU framework is not to become less competitive than the UK Wholesale Markets Review. Pre-trade

Spring 2022

It seems to us that a post-trade consolidated tape with the current scope – covering derivatives subject to the clearing obligation – does not have user appetite, and no impact assessment has been done. Roger Cogan, head of European public policy, ISDA

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DERIVATIVES

ISDA

DERIVATIVES CUSTODY

ISDA

Latest regulatory updates from May ISDA AGM in Madrid: • ESMA’s review of the MiFIR transparency regime culminated in November’s publication of proposed amendments to rules including the derivatives consolidated tape. Verena Ross, chair of ESMA, gave a presentation on the topic in Madrid defending the idea of removing the SSTI thresholds (see main text): “We hear your concerns regarding this proposal and, in particular, about the possible impact it could have on systematic internalisers or, more generally, the liquidity available through them. As we all know, the question about where to strike the balance between transparency and liquidity is not new,” she said. “Indeed, this debate resurfaces every time there is a push for more transparency. So far though, I have to say, the specific concerns about the detrimental effect of more transparency on liquidity have not materialised.” Nevertheless, ESMA has recommended lower large-in-scale thresholds to help counteract this effect. In addition, the derivatives and ETF consolidated tape for derivatives and exchange traded funds will take a back seat to those for bonds and equities. “This would allow us at ESMA to concentrate our resources and efforts and provide more time to market participants and regulators to address remaining issues in other asset classes (such as derivatives), for instance in relation to the format and quality of the transparency reports,” Ross said. • ESMA’s consultation on rules aimed at tackling “procyclical” margin effects following the pandemic closed in April, but the agency has extended the timeframe for implementation following feedback and market conditions. Speaking on a panel at the International Swaps and Derivatives Association AGM in Madrid, Nicoletta Giusto, independent member of the European Securities and Markets Authority CCP supervisory committee, said the consultation on the clearing model tools has been extended. Giusto said: “We stand ready to engage and to revise the original program that was to finish by July, which has been delayed to allow further submissions and to make further reflections. “The responses we have seen so far have been really differentiated depending on the class of market participant - infrastructure, dealers, clients and so on - so we will have to arbitrate and balance between those interests. The stability of the central counterparty is our main goal, but without putting undue stress on market participants.”

Spring 2022

transparency is very damaging for systematic internalisers because that data is attributed, and has the potential to damage client pricing.” One area where European rules lead the world is in the application of socalled anti-procyclical (APC) margin measures for clearing houses. During the ISDA AGM, Karl moderated a panel on the topic where Nicoletta Giusto, independent member of the ESMA CCP supervisory committee, confirmed it would delay the planned update to APC margin models and rules to undertake a further consultation focused on clearing member clients. Those derivatives users had suffered from spiralling margin costs, particularly in commodity markets, as severe volatility impacted the perceived risk of their position. ISDA has been among several trade bodies calling for a rethink on the way the rules are calibrated, arguing that too much emphasis is given to the clearing houses themselves in the assessment and stress tests, rather than the impact on the clearing members who contribute the most in the form of default funds and margin contributions in the event of a non-payment event. “As procyclicality affects the whole industry, risk appetite for procyclicality cannot defined by the CCP on its own, but needs to take into account the risk appetite of clearing members and clients,” Karl said. “Our key point is that clearing members, clients, CCPs and regulators should agree what a good level of procyclicality should be and then define a standardised measure to assess CCP models against the agreed levels of procyclicality. For instance, that measure could be how the current margin model performed over the past 15 years on a back-test basis, and then let the CCP focus on implementing that.” While some of what ISDA, the FIA and others have said differs to the views of the clearing houses and their trade bodies, one area where they all agree is that a draconian or homogeneous approach would not fit with the different risk profiles and practices that different CCPs have adopted over time. “An overly prescriptive approach could introduce model risk into the system,”

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Our argument is mostly one of fairness. If clearing participants rescue the CCP by getting losses allocated, they should then also participate in future profits of the CCP, as the recovered CCP would not be in a position to make these profits without the loss allocation to clearing participants. Ulrich Karl, head of clearing services, ISDA

Karl said. “If everybody is using the same tools, then margin models will behave in a very similar way in the next crisis. CCPs are aware of how to manage procyclicality. They should define themselves what antiprocyclicality tool would be best for their products and markets, as long as there is a standardised measure to assess the outcome. This could be a back-test over a period including significantly stressed markets.” One point made at the ESMA open hearing on its APC update plans in March, before it confirmed the market disruption driven delay and further consultation, was that it should wait for the result of parallel efforts to analyse and assess global margining practices by the Basel Committee for Banking Supervision (BCBS), the Committee for Payments and Market Infrastructure (CPMI) and the International Organisation of Securities Commissions (IOSCO). ISDA submitted a response to the consultation in January, along with the Institute of International Finance (IIF). One key example stemming from that work is the importance of the test period in such exercises, Karl said. “With a 10-year margin floor, all stressed observations from the credit crisis had just rolled off by March 2020,” he said. “Floors were probably lower than they should have been in some cases. As a result, in our response to the BCBSCPMI-IOSCO consultative report, we suggested that a stress period should be included in the floor and welcome that this suggestion has been taken up by ESMA.” A separate consultation conducted

Spring 2022

by the Financial Stability Board, CPMI and IOSCO in March looked at CCP financial resources for recovery and resolution and included analysis on recovery performance in stressed scenarios on 13 CCPs. In a joint response to that analysis, submitted with the FIA and IIF published in April, the bodies suggested adding a “fairness” test to the recovery and resolution analysis. They also called for an assessment of CCP equity, pre-positioned resolution resources, compensation for market participants and guidance on recapitalisation. That has opened the issue of “skin in the game”, and whether clearing houses themselves should redistribute profits after calling on member funds to alleviate default events, through cash calls or variation margin. “The question of compensation for losses from recovery and resolution is very much left open,” Karl said, referring to the paper. “Our argument is mostly one of fairness. If clearing participants rescue the CCP by getting losses allocated, they should then also participate in future profits of the CCP, as the recovered CCP would not be in a position to make these profits without the loss allocation to clearing participants.” With such a huge amount of change on the horizon, and a proliferation of periodic stress tests and margin methodology assessments for clearing participants, there have been repeated calls from ISDA and others for more cooperation and coordination between the various regional and supra-regional authorities. The good news, in Karl’s view, is that this is now in evidence, particularly

in the global efforts to update the rules surrounding trading and clearing of interest rate swaps referencing risk-free rates (RFRs) to the Interbank Borrowed Rates, a phased process that has seen the UK become a first mover in cessation in December last year. “Whether it’s the clearing obligation for risk-free rates or stress tests and related clearing proposals, we do believe regulators consult and coordinate across jurisdictions,” he added. “For instance, the Bank of England and ESMA consulted each other before proposing their clearing obligations for swaps referencing risk-free rates (although the European version has yet to come into force), and the recent Commodity Futures Trading Commission notice of proposed rulemaking was designed to align with the European and UK rules.” The US CFTC published in May its proposed changes, removing sterling, Swiss franc and Japanese yen Libor as a reference point for interest rate swaps, as well as derivatives referencing the Euro Overnight Index Average (EONIA) from eligible Overnight Index Swap instruments. In the latter case, a series of maturities for US, Euro, Swiss, Japanese and Singapore RFRs are allowed, as well as an extension of the range for the UK RFR. US Libor referencing swaps will be removed on July 1, along with swaps that reference the Singapore Swap Offer Rate. The approach very much mirrors the actions of the Bank of England and UK Financial Conduct Authority in October last year, when they consulted on their measures.

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DERIVATIVES

ISDA

DERIVATIVES CUSTODY

ANALYSIS: UNCLEARED MARGIN RULES

Uncleared Margin Rules How to manage cost and complexity? Futurisation is spreading in the derivatives market, as more firms come into scope of new rules for initial margin, say participants to the Eurex Derivatives Forum 2022’s Product Innovation in the light of UMR session, held on May 25. Regulation around Uncleared Margin Rules (UMR) was introduced in response to the global financial crisis of 2008/9. One particular area of reform focused on initial margin (IM) requirements, tightening the rules around the posting of collateral for over-the-counter (OTC) derivatives transactions. The phased approach to UMR implementation has posed legal, operational and technical challenges, with an increasing number of buy- and sellside entities in scope of the new rules since they came into effect in 2016. But one area where questions also remain is how some practical challenges around UMR are driving product innovation and finding exchange-traded alternatives to those swaps contracts subject to UMR. “What we mean by innovation is, in practice, how you shave the corners off an OTC product, move it into a centrally cleared, exchange-traded environment, and make it beneficial for all parties involved,” says Stuart Heath, director, equity product design at Eurex, who is also a panellist on the Eurex Derivatives Forum 2022’s Product Innovation in the light of UMR session, in Frankfurt on May 25. Eurex has worked with clients which have been impacted by UMR since September 2016 more buy-side clients are coming on board as the latest deadline approaches (known as phase 6 and set for September 2022). A common denominator for all has been the costs and complexity associated with the updated IM rules: from managing the collateral and funding it,

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to risk modelling, and arrangements with multiple counterparties and custodians. As such, firms have been looking for cleared and listed alternatives to swaps, which would minimise their margin obligations and counterparty risk, and be more efficient on the balance sheet. According to fellow panellist Axel Lomholt, chief product officer, Indices and Benchmarks at Qontigo, listed products are becoming central to investor portfolios. “There’s a lot of new product development happening in this segment, which brings risk, cost and collateral management benefits, as well as opportunities in trading and equity financing for investors,” he says. Qontigo is the administrator of STOXX and DAX indices. Back to the future

One such product launched by Eurex in 2016 is the index total return future (TRF). It was designed to hedge the implied repo risk of on equity markets and provides returns analogous to an OTC total return swap. An equity version of the TRF (ETRF) followed in 2019. Put simply, the buyer of a TRF will benefit from the price movement of the underlying index or stock in addition to 100% of its dividends from the seller. In return, they pay the euro short-term rate €STR plus the equity financing rate. There are key benefits to TRFs such as the ability to cross margin the prod-

uct against other positions held in equity and indexes, which frees up a bank’s balance sheets. While they started as a product in support of repo structured product hedging, they have now become acknowledged as a key part of institutional investor portfolios. “Listed products have been one way to access previously inaccessible markets for a whole host of investors,” says Lomholt. “Additionally, ETFs have helped drive down fees because traditional active funds have historically been expensive.” “You can now build portfolios with a variety of listed products and use them as a great cost-control mechanism. On top of that, in many of those products you get the transparency and neutrality of an index underlying.” Eurex went from introducing a TRF based on the EuroSTOXX 50 index in 2016 to recycle the risk from structured products, to now effectively having most of the interbank market in that product. “The OTC swap is effectively more a bespoke bank-to-client product now as a lot of the flow has moved to the listed alternative,” says Heath. More recently, Eurex introduced basket TRFs (BTRFs), also as an equity financing tool. It’s also based on its OTC swap equivalent product but with the added benefit of optimising IM and lowering costs. The basket trade functionality, launched in December 2020, allows market participants to construct and ‘modify a basket swap position in a set

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ANALYSIS: UNCLEARED MARGIN RULES

of underlying reference equities for the first time,’ according to the Deutsche Boerse-owned exchange. The basket TRF was lauded as leveraging the advantages of futures contracts and the flexibility of baskets while also being traded on an exchange. The trend towards the ‘futurisation’ of products also saw the introduction of thematic index futures earlier this year. These can be considered as a natural evolution of the BTRF. As investing in thematic indices – which reflect structural trends such as, for example, ESG, artificial intelligence, automation or healthcare - becomes more widespread, it’s expected that the market for BTRFs will grow. Buying in

The earlier rounds of UMR targeted banks and larger buy-side firms, leading to a change in trading behaviours. Initially aimed at the sell-side, many of these futures-based products have seen increasing uptake from buy-side firms looking to benefit from centralised clearing and added transparency linked to futures. As more buy-side firms have come into the scope of UMR in the latter phases of the rules being rolled out, they turned their attention to exchange-traded versions of swaps. “The last phase will continue this theme, with smaller buy-side firms, hedge funds and corporates further moving the dial in favour of listed products such as TRFs, thematic equity derivatives and other exchange-traded products,” says panel moderator Luke Jeffs, managing editor of Global Investor – FOW. In fact, nearly three-quarters of participants to a survey conducted by the TABB Group in 2014 said they expected their listed futures trading volumes to increase in the next year. Specifically, buy-side firms noted they would expand the use of ‘futures in equity-related products and expect to increase their activity in equity options by as much as 89%’. Futures have become a source of additional liquidity for the buy-side, who considers these products as a complement to their OTC counterpart.

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I think some of the buy-side is quite surprised at how innovative some of the on-exchange products can be. There are some different products they can potentially use for Beta replication in their portfolios, not just use them for a little bit of peripheral hedging and cash management. Stuart Heath, director, equity product design at Eurex

“What we are seeing now is some firms deciding to do a listed alternative under a futures agreement,” says Heath. “They would maybe trade swaps with their core counterparties because they’re going to rely on them to give them the liquidity they need out of that swap, but for other products, they can trade them as a future. That flexibility is coming through.” The certainty brought on by clearing, more standardised processes around

the trading of futures products and more pricing options (beyond a bilateral trade) are also factors contributing to more demand from the buy-side. “I think some of the buy-side is quite surprised at how innovative some of the on-exchange products can be,” says Heath. “There are some different products they can potentially use for Beta replication in their portfolios, not just use them for a little bit of peripheral hedging and cash management.”

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Cboe to tweak latest retail offering after launch Cboe Global Markets is considering expanding the breadth of available strikes in its new small size retail options product, as the US exchange digests the effect of extreme market moves on adoption trends. By Radi Khasawneh. The exchange group in March launched its Nanos S&P 500 (SPX) index options, with four committed brokers; WeBull Financial, Interactive Brokers, TradeStation Group and Tradier. Over the course of its first week of trading, there was a nearly 7% move in the underlying index, likely encouraging more experienced traders to jump into the market. “On the trading front, I think you could make the argument that people who are a little more familiar with trading options and wanted to experiment with Nanos had a market environment last week where things were whipping around and they could take advantage of that,” Rob Hocking, head of derivatives strategy at Cboe, told Global Investor. But Hocking said he understands that a more-than 6% rally in the index in just five days may have scared options trading novices so his team are looking at tweaks to reflect the current levels of volatility. “We’re focussed on the job of adding more brokerages and gathering feedback from users at the moment,” Hocking said. “One example of that has been that our analysis showed likely demand would be clustered around five strikes around the at-themoney points. With the size of the moves last week over such a short period of time, we are evaluating whether we should add extra strikes to take account of severe market moves. That could just add an extra dimension, so it’s a process of growing that functionality.” In its own assessment of retail demand, Cboe estimates that in 2017

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24% of the options volume that traded was between zero to five days. In 2021, that number almost doubled to 46%. The Chicago-based exchange said options trading in contracts up to five days (a good proxy for retail demand) doubled in the four years to last year. As it looks to tap that trend, the Nanos allow for trading at one hundredth the size of the standard Mini, with an expected average premium price of $5 (£3.69) per contract. As part of that assessment of retail needs, the exchange clustered strikes around the at-the-money level. The Nanos SPX contract is a simplified version of the standard MiniS&P 500 index option contract, trading at a one times multiplier, cash settled and available as a European-style option only. The structure is designed to appeal to retail investors, limiting the impact of downward moves and allowing for flexible exercise dates during the trading week. The exchange has also engaged in a parallel effort to roll out its education platform designed to support understanding of the options market. “The launch of Nanos went smoothly and we have four brokerage platforms

that were there at launch,” Hocking said. “And with the launch, the education journey begins. At the same time, we also launched our redesigned Options Institute website. There will be a steady stream of new content, such as articles and courses, that we will be releasing over time to keep it fresh and keep people coming back for more. “Alongside that, we’re rolling out something called Office Hours that you can sign up for on Cboe’s Options Institute website, where you can talk live with one of our adjunct faculty members. This, to me is a great thing and we think it will lead to greater engagement with Nanos.” Once the firm deepens adoption, adds functionality and extends its broker network, it will look to adding other indexes such as the widely referenced Dow Jones Industrial Average to the Nanos product suite, the exchange said. Hocking concluded: “As we see adoption translate into increased volumes, we will be ready to see whether adding other indexes like the Dow will make sense – widening that functionality to track the way retail tends to think about the market.”

As we see adoption translate into increased volumes, we will be ready to see whether adding other indexes like the Dow will make sense – widening that functionality to track the way retail tends to think about the market. Rob Hocking, head of derivatives strategy at Cboe

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FX COUNTERPARTY RISK

Banks switch focus to FX counterparty risk - experts The application of new rules governing bank derivatives exposures has had many banks looking to reduce counterparty exposure and switch FX derivatives positions to exchanges or clearing. By Radi Khasawneh. The roll-out of the Basel Committee’s Standardised Approach to Counterparty Credit Risk (SA-CCR) has recently taken a backseat to the Libor transition in interest rate swaps and the extension of Uncleared Margin Rules (UMR). But banks are now switching focus to foreign exchange exposures and are looking for ways to efficiently manage their risk without incurring punitive capital treatment. The SA-CCR was primarily designed as a mechanism to recognise margined trades and the benefits of netting, replacing the old current exposure method. Erik Petri, head of OSTTRA’s triBalance service, says the bank has been among the first movers in offering SA-CCR focussed optimisation to clients in foreign exchange derivatives. “It’s not really in the interest of the market to continue to optimise initial margin blindly, without considering the implications for the capital exposure,” Petri, the head of triBalance at TriOptima, told Global Investor. “As a result, we started offering clients the option to optimise the capital exposure under SA-CCR, together with the initial margin measure, from October the year before last. We wanted to allow clients to be able to hit the ground running when they started feeling the pain from this updated capital regime.” The service announced in April that its latest SA-CCR optimisation cycle was its largest ever. The firm’s counterparty credit risk network now includes around 40 firms, with nearly half of those already live optimising capital. The client count rose by 30% in

Spring 2022

March alone, and SA-CCR efficiencies alone were 350% greater than the previous record in the late January cycle. That has been partly driven by European adoption of the rules in September. “The 18 months that have passed since we started optimising SA-CCR allowed us to have proper client validation of the solution that we have in place, it has allowed our clients to use a prolonged period of time to do testing,” Petri said. “When Europe went live on the new capital regime, we saw a bump in the participation levels, and then following year end, demand has just exploded. The end of November and beginning of December was when we saw attention switching from Libor reform to the changing capital regime.” Paul Houston, global head of FX products at CME Group, agrees that SA-CCR is set to emerge as a more dominant trend in bank thinking this year. His firm has developed capital efficient FX block trading and exchange for related positions (EFRPs) that offer over-the-counter (OTC) derivative style execution, with a chosen counterparty, but in a cleared product on exchange. “We expect over time, SA-CCR will change behaviour from banks,” Houston told Global Investor. “The actual effect is still unclear, but on the surface, it is expected that directional trades will be more counterparty capital heavy. “Compared to the previous capital regime, margin can offset capital costs and exposures. So this trend for blocks and EFRPs could help with SA-CCR exposures for banks, because

the resultant trade will end up in a clearing house which has a lot lower capital footprint. That isn’t a trend that’s playing out yet, because it’s just starting to be implemented by banks, but that is one to watch.“ The Chicago-based exchange group said in April it had seen a 280% increase in trading activity in blocks and EFRPs in the year to March 28. The product provides clearing for FX forwards, nondeliverable forwards and FX options, and the success has in large part been driven by these regulatory changes to the way the margin and collateral dynamics have shifted. “We now have 20 plus liquidity providers in our network, and many of the major banks are now providing liquidity for this block and EFRP service. We feel there’s more structural reasons behind this adoption of blocks and EFRPs. “This September, we have phase six of the UMR coming into effect, which means a lot more participants are eligible or maybe caught by the lower threshold. This mode of execution can help the buy side minimise the impact of uncleared margin rules.” Buy side firms in September will be subject to a lower threshold for application of the rules in phase 6, meaning those with an Average Aggregate Notional Amount (AANA) of derivatives above $8 billion (£6.14bn) will be caught by the rules. “We see demand from asset managers to either move notional positions using an EFRP into the listed world, or to just trade a block as an alternative to an OTC FX Forward to manage their AANA exposure,” Houston said.

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LCH waives client fees to grow credit options service LCH’s CDSClear business is using fee waivers to incentivise use of its new client index options service, as the LSE Group-owned clearing house looks to add more clearing brokers. By Radi Khasawneh. The LSEG-owned clearing house said in March J.P. Morgan and BNP Paribas were the first banks to enable credit index options clearing through their service, which is free for clients to use for the rest of this year, according to Michael Amakye, head of sales at CDSClear. Amakye said: “We are very much thinking of the long term, and we want to encourage and really educate clients on the efficiencies they may be able to benefit from when it comes to margining. We want to incentivise people to come to this market with confidence so we have provided full discount of client variable fees through the course of 2022.” As well as education and incentives, CDSClear sees the network effect of adding more clearing brokers as a key component of building momentum in a large and relatively untapped market. “We’re very excited to have these two clearing brokers live, but it doesn’t stop there,” Amakye told Global Investor. “We’ve got seven entities on the platform who are providing liquidity today, and we’ll be looking to add to the two clearing brokers we currently have. “The client market is much larger than the dealer market, so this is a big milestone. Sometimes trading the options is a much more efficient way of hedging for clients than trading standard indices.” CDSClear launched its credit index options clearing service in 2017, covering the European iTraxx Europe Main and Crossover indices, before extending it to cover the US CDX high yield and investment grade (CDX.IG and CDX.HY) indices in 2020.

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“Our US product clearing activity has been increasing year-on-year, and this looks set to continue given the recent volatility in the market,” Amakye said. “We have tried to carve out a niche and provide our clients access to the widest breadth of products. The credit index options addition is an example of this, and we know that there’s demand for this from both the house side and the client side.” LCH said in January that a 133% year-on-year increase in cleared iTraxx options led to a 2021 notional record of €163 billion (£135.9bn). US index options cleared $42.5 billion (£32.4bn) last year, and the run rate in the year so far has benefitted from market volatility. Regulatory headwinds affecting buy side portfolios, including the roll-out of uncleared margin rules, has increased the impetus for voluntary clearing, Amakye says. “From a client perspective, I think cost is a particular area of interest,” he added. “For the options products that we’ve currently launched, the iTraxx Main and the Crossover as well as the CDX.IG and the CDX.HY, the main indices underlying them are all subject to clearing mandates. “So if your client is already clearing the standard indices and not also

Michael Amakye, head of sales at CDSClear clearing the options on those indices - it is simply not efficient from a cost perspective. If you put both of them together in the same pot from a margining perspective, you can realise offsets of up to 90% for delta hedged options.” LCH’s ForexClear is also looking to expand coverage and harness the flow of voluntary clearing in overthe-counter markets, after adding in March Japanese yen-denominated deliverable option clearing to its service.

The client market is much larger than the dealer market, so this is a big milestone. Sometimes trading the options is a much more efficient way of hedging for clients than trading standard indices. 41

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TP ICAP

TP ICAP looks to LatAm markets after cementing Singapore FX plan TP ICAP has said it plans to add Latin American (LATAM) foreign exchange instruments and include forwards as the London-based group prepares to meet ambitious targets for its Fusion FX platform. The largest inter-dealer broker has outlined plans to expand the application of its Fusion platform across various asset classes in its global broking division. In its analyst presentation, the firm estimated that 55% of global broking revenue from over-the-counter asset classes will be migrated to the broker’s Fusion platform, up from around 20% in 2021. That includes a plan to increase this year the coverage of its FX broking service to 65% of total FX revenues from 35% last year. The broker will do this by expanding its network of regional hubs, and announced plans to launch an FX hub for Fusion in Singapore, starting with Asian one-month non-deliverable forwards (NDFs). Joanna Nader, group head of strategy at TP ICAP, told Global Investor the move is one step in a global strategy to create an interconnected infrastructure. “The intention here is that Singapore will be an important hub within the global Fusion FX program, very much operating alongside work being done in other centres to support global coverage,” Nader said. “In order to accommodate client connectivity, latency, and regulatory requirements we will have hubs in other regions. Like other FX products, Asian NDFs are traded globally, but with a lot of the volume coming out of Singapore, so that’s a driver.” TP ICAP is in the process of ensuring the liquidity framework is in place, with new instruments and markets

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Everything is ready from a build perspective, so the next step for us is to get the liquidity live on the platform. Joanna Nader, group head of strategy at TP ICAP

very much in scope in what is a landmark project. “Everything is ready from a build perspective, so the next step for us is to

get the liquidity live on the platform,” Nader said. “We’re currently talking to the major FX dealers in every region, gathering feedback and working on building connectivity. “Once we have a critical mass of liquidity providers, that’s when we would anticipate going live. Throughout 2022 we will continue to add new markets to Fusion FX, including LATAM NDF and FX Forwards, making it more and more attractive for clients to connect. We want Fusion FX to be the standard in the market and the inter-dealer space for FX trading, so it’s a significant piece of work.” With support for its platform from local regulator the Monetary Authority of Singapore, TP ICAP has said it plans to augment its initial one-month Asian NDF plans with FX forwards and other tenors. The evolution will be informed by the needs of its bank dealer clients, the firm says. “The interesting thing about the one-month Asian NDF market is that it’s a fully electronic market,” Nader said. “One way to think about it is that it is similar to the spot market for deliverable currencies. It’s also still a relatively young market, and as the uncleared margin rules roll out to cover more buy-side firms and central clearing develops, the growth drivers are there. Our platform is intended to be an additive to what is already existing in the market, and particularly to help banks around larger size risk transfer.”

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The Montreal Exchange eyes opportunities in Canadian rates The Montreal Exchange, Canada’s derivatives market owned and operated by TMX Group (“TMX”), is responding to increased demand for interest rate hedging tools, structural changes linked to the transition away from Libor and a trend in its domestic market to explore the longer end of the curve with changes to its established interest rate product suite. By Luke Jeffs Speaking to Global Investor, Robert Catani, Head of Institutional Sales and Trading Fixed Income & Derivatives at TMX, said Canada is an interesting market for international traders in its own right, but it also benefits from its relationship with its powerful neighbour. “As a G7 country, Canada has one of the strongest economies in the world while the proximity to the US market is favourable. Our interest rate market, while it does not mimic the US per se, has a common trading element that makes Canada unique. Canada-US spreads, whether they be at the front end spreads or out in the five or ten year part of the yield curve, are constantly being traded by international investors, not only in North America but across the globe.” Catani said the US and Canadian economies are intertwined but their interest rate markets are different in that Canada’s is not as liquid at the longer end of the curve. “If you look at the US, the 30-year is a vibrant market and the 30-year mortgage market spread is based on 30-year rates. The Canadian mortgage market, however, is predominantly five years. Most people in Canada, if they have a mortgage, will either fix for five years or they will go for a one-to-three or four-year floating rate. “The biggest dynamic in the

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Catani: “The biggest dynamic in the Canadian yield curve is that all this business in the mortgage market is conducted in the one-tofive year term and that is the most active part of the Canadian yield curve.”

Canadian yield curve is that all this business in the mortgage market is conducted in the one-to-five year term and that is the most active part of the Canadian yield curve. “At the long end, whereas the US has this vibrant long-end based on 30-year rates, Canada does not so our

supply in the 30-year part of the yield curve is somewhat limited where the only issuers are provincial governments, the Government of Canada and certain corporations,” he said. Catani believes the Canadian market has not historically provided the fixed income products to satisfy the specific requirements of pension plans or fund managers trying to match their longer term liabilities. “The result is that the tens/ thirties curve in Canada has historically been tighter than the tens/ thirties curve in the US, and that is something that international investors need to be aware of. It has been that way for decades and I do not see that changing.” Yet, Catani said there are some recent green shoots at the longer end of the curve, partly as a result of the economic pressures of the Covid-19 pandemic. “For the first time, the issuance at the long-end by the Canadian government has exploded because of the pandemic spending by Canada and other countries so we finally have more securities that are available on the government side at the long-end of the Canadian yield curve.” In November 2021, the Montreal Exchange launched a new marketmaking program on its 30-year Government of Canada Bond Futures (LGB™) backed by National Bank

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Financial and Desjardins Securities. The plan was to increase the number of liquid points on the Canadian listed yield curve and, thereby, enable hedging with longer maturity instruments. Trading volumes in the LGB remain relatively light at fewer than 10,000 lots a month but the exchange has high hopes for this product, which complements its more established contracts. “Prior to a couple of years ago, international investors had the ability to trade the BAX™, which is the short part of the Canada curve like the US Eurodollar futures, and the Ten-Year Government of Canada Bond Futures or CGB™, our premiere product. About four years ago, we launched the Five-yearGovernment of Canada Bond Futures or CGF™ contract which is now a big part of the Canadian fixed income futures market that trades vibrantly and is very liquid. “This gave investors another part of the yield curve they could attack and it has been terrific for the Canadian market as there is so much more hedging to be done at five years domestically.” The Montreal Exchange CGB future is the group’s most popular interest rate future, trading just over 2.8 million lots in March 2022, according to the Exchange. The Three-month Canadian Bankers Acceptance (BAX) is the next most-traded product at 1.9 million lots in March 2022 and the CGF is the group’s third most liquid fixed income contract, trading just over 960,000 lots in March 2022, an increase of 47% on the same month last year. Catani continued: “Following

Given the US is quickening its adoption of SOFR futures and moving away from Libor, I think we are going to see that whole ecosystem of cross-currency swaps trading create a more vibrant RFR market in both Canada and the US

that success, we launched just over one year ago the CGZ™, which is a Two-year Government of Canada Bond Futures, again addressing a big domestic market need for low cost products that you can use to hedge. So we now have vibrant trading in the two-year, five-year and 10-year, giving international investors the opportunity to trade Canada without having various relationships with dealers.” The Montreal Exchange Two-year Government of Canada Bond Futures (CGZ) traded over 321,000 lots in March 2022, up 86% from the same month last year. The exchange, like many of its G7 peers, is also helping clients manage their transition away from discredited Libor-based lending rates to new, risk-free rates (RFR). The Canadian RFR is the Canadian Overnight Repo Rate Average (CORRA). Catani said: “As in the US with the transition to SOFR futures and the UK with the transition to SONIA futures, we are beginning our transition now and we are relaunching CORRA futures in May. We expect that market to be pretty vibrant in 2023.” “The RFR gives people around the world the ability to trade a true rate based on data from the Bank of

Canada and is not, therefore, open to manipulation, and has no credit spread in it. The ability to cut-out the credit component on the risk-free rate is significant and gives everyone the ability to trade the front end based on Canadian monetary policy and not on credit risk.” The US has mandated the cessation of Libor for new contracts by the end of next year, but firms are voluntarily moving across to US RFR ahead of that deadline. CME Group, the largest US rates market, said in late April that its SOFR futures book surpassed its legacy Eurodollar futures market for the first time on April 19. Catani concluded: “Given the US is quickening its adoption of SOFR futures and moving away from Libor, I think we are going to see that whole ecosystem of cross-currency swaps trading create a more vibrant RFR market in both Canada and the US. I think we will also see all the swap derivatives transactions in Canada migrate to hedging with CORRA futures as early as the middle of 2023.” International investors can capitalize on Canadian frictionless futures trading and portfolio diversification opportunities almost 24 hours a day. Learn More at https://app.tmx.com/ canadian-futures/en/

This information is provided for information purposes only. The views, opinions and advice provided in this article reflect those of the author. This article is not endorsed by TMX Group or its affiliated companies. Neither TMX Group Limited nor any of its affiliated companies guarantees the completeness of the information contained in this publication, and we are not responsible for any errors or omissions in or your use of, or reliance on, the information. This publication is not intended to provide legal, accounting, tax, investment, financial or other advice and should not be relied upon for such advice. The information provided is not an invitation to purchase securities listed on Montreal Exchange, Toronto Stock Exchange and/or TSX Venture Exchange. TMX Group and its affiliated companies do not endorse or recommend any securities referenced in this publication. BAX, CGB, CGF, CGZ, LGB, Montréal Exchange and MX are the trademarks of Bourse de Montréal Inc. TMX, the TMX design, The Future is Yours to See., and Voir le futur. Réaliser l’avenir. are the trademarks of TSX Inc.

Spring 2022

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Managing change

Ben Pumfrett, Head of Product and Profitability, Middle Office - RBC Investor & Treasury Services. When talking to asset managers, what do you think is top of the list in terms of the challenges they’re facing when dealing with their firm’s middle and back offices? The first thing they mention is increasing complexity, both from an operational and a regulatory perspective. Challenges we often discuss include supporting market changes linked to market expansions or new asset classes, achieving scale while balancing costs and managing operating models underpinned by legacy technology. In addition, in-house operational teams are seeing great demands from the front office, particularly when it comes to the data needed to feed front office decision-making. As such, requirements for greater integration are pushing the middle and back-office teams to perform value-add tasks to support traders and their management team. This additional level of complexity against the backdrop of legacy technology and internal resource bandwidth are challenging the best of teams.

Naturally, individuals are focused on business as usual functions, therefore expecting this additional level of acute expertise in support of a project to help meet these change obligations can be difficult. We often see this as the biggest blocker for projects internally as it can prevent asset managers from moving forward at the speed of change being targeted. The final point I would mention is the increasingly global aspect of business. Many asset managers we partner with are regionally focused, and therefore being able to deploy a global operating model can be a challenge. However, this pivot is essential to support their expanded investment markets and asset classes, particularly against the backdrop of regulatory reporting and shortening settlement cycles. All these factors play into how much asset managers can focus on their core capabilities, investment strategies and distribution networks, while also delivering strategic change. Few organisations, let alone financial organisations such as RBC, operate in an isolated

national environment. As you mentioned, managers who expand outside of their home market find they’re operating with different rules, regulations and market environments. How does that work in practice? Market expansion, navigating new regulatory demands and adapting to unique market nuances can be challenging and managers need to have flexibility and deep knowledge of their systems to navigate ongoing changing situations. We are also witnessing shorter settlement cycles in many markets, which can create more of a challenge when it is time imperative to solve issues. Add to that the penalty regime under CSDR that now crystallises a commercial impact if issues aren’t dealt with in a timely manner. There’s a compression effect on both sides to ensure transactions settle on time and this time window is only going to reduce further with the plans for other markets to push to T+1. Some of our North American clients trading in European and Asian markets lose most of their

By having an outsourced middle office trade management service and leveraging a global footprint and operating model, asset managers are better equipped to deal with shortened windows or market changes such as the CSDR penalty regime. Spring 2022

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working day before they can resolve queries with local brokers. By having an outsourced middle office trade management service and leveraging a global footprint and operating model, asset managers are better equipped to deal with shortened windows or market changes such as the CSDR penalty regime. Having a small window to operate and make changes can be a challenge, more so when there is just a regional operating model in place. Another area of focus for asset managers is the increased performance and efficiency of their operating model, in particular dealing with brokers and custodians in their time zone and not dealing with matters the next day. A dynamic outsourcing solution can help reduce the impact of queries on teams and increase the client experience by providing greater certainty on the data being used by the front office. Asset managers are facing some fee compression and ongoing low interest rates at the same time. How do you think they’re coping with these wider marketrelated stresses? The fee compression we are seeing definitely has knock-on effects on suppliers. As mentioned previously, managers are looking at costs as well as new ways of gaining alpha through new strategies, expansion into a specific region or new asset classes such as fixed income, private capital or derivatives. This focus on getting into other asset classes puts pressure on managers’ middle and back-office teams, technology and their ability to support these expansion plans. As part of this they are also working on how to reduce in-house costs and focusing on the firm’s core competencies. This is where outsourcing comes into play which is moving further up the chain in terms of middle office activity and even into execution.

Spring 2022

When it comes to intraday data specifically, it’s about getting the data in order before absorbing it and providing transparency to any exceptions. Being able to move from a fixed to a variable cost base can be attractive and this is helping drive the outsourcing market further. Managers are also relying on legacy technology and know a significant capital investment may be needed to update their technology in support of their ongoing operating model and front office demands. In some cases, they find themselves at a crossroads which forces them to question what they want to achieve and what that next step looks like. For example, do they want to invest in an expensive capital outlay to update systems or can they get access to systems needed at a cost they can manage. The pandemic has brought this decision point forward on many fronts, because working from home has put a lot of focus on asset managers’ operating models in terms of how they work and importantly, their resilience. This has really come to the fore in the past 18 months, with managers not only reviewing how they can meet existing regulatory and front office demands, but also how they can ensure they have a robust operating model going forward. Everything we have talked about comes back to data: its availability (including timeliness), volumes, data flows etc. As such, it’s fair to say a challenge is always data. How do you think managers are coping with those growing amounts of data that they’re having to effectively manage? The demand for decision-making data is clear and ever increasing as is the sheer amount of data that is now available. The challenge is not only

access to the data, but timeliness and accuracy of it. Asset managers can become overwhelmed with the level of data and their ability to absorb it. They need to ensure they have the right data and have confidence in its accuracy before it’s flowed through the business. We are seeing much higher demand from the front office for intraday data, especially around cash management. Any asset manager we speak to always brings up cash management as one of the top challenges, particularly where they have multiple providers or custodians, and when they want a consolidated and consistent view of their cash positions. Having a clear view on cash not only assists on being able to more fully invest cash to improve performance but also avoidance of costs or regulatory/ mandate breaches from overdrafts. It’s not just about dealing with multiple parties or different formats – it’s about trying to manage how they work together, which can be a challenge. When it comes to intraday data specifically, it’s about getting the data in order before absorbing it and providing transparency to any exceptions. This leads to the other key element which is the integrity of the data. Demand for more intraday data is one thing but managers still want certainty over that data, or at least be able to identify exceptions. The ability to have that exceptionbased view – by this, I mean highlighting data attributes that may be above a certain tolerance level or transparency to the checks performed, so that there’s confidence in the data that’s going back into the front office – has also been highlighted as a focus area.

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CUSTODY

THOUGHT LEADERSHIP: RBC Investor & Treasury Services

CUSTODY

THOUGHT LEADERSHIP: RBC Investor & Treasury Services

We have seen a fair amount of consolidation on the asset manager side recently. How are managers dealing with this as they seek to grow their businesses through M&A? We have certainly seen plenty of M&A activity. In practice, this means merging the cultures of the two firms, their operations teams, but also possibly different operating models, technology systems, including respective front office systems and risk monitoring. This can also introduce multiple service providers where asset managers all want to get a consistent view of data, be able to check their risks and manage their business correctly on a holistic level. Ultimately, it still comes down to data consolidation and aggregation. In the longer term, it’s about integrating technology and operating models to achieve the efficiencies and cost savings targeted via the combination. There is a balance between being able to maintain control of your business and receiving the benefits from that M&A activity, which means looking towards single platform/single operating models where possible. However, this is time-consuming. Asset managers will move certain activities first to get some benefits and certainty from a data perspective. They can carry out that data consolidation work with an external provider or in-house. By doing that, they can have a holistic view of their position and then work on the backend plumbing to finalise details. There may be reasons that they aren’t able to move out of some technologies, and that can take time to process, so having a data solution that provides that consolidated view allows progression while the back-end consolidation progresses more slowly. Having data that allows asset managers to have complete oversight provides direct control over their business. However, the challenge as earlier mentioned is that this can be quite time consuming for the asset manager in terms of resources,

Spring 2022

By providing clients with the tools and access to be able to identify the important differences, they can focus on resolution and monitoring rather than on identifying or replicating activities to check the work of the provider. especially when it comes to backend consolidation. It’s about being able to free the people that have that knowledge away from the BAU. They must find a way to do that if they really are to benefit from the M&A activity and reap the benefits. We have discussed the macroeconomic market environment challenges, data and the competitive landscape. In your view, what are some of the options for asset managers to deal with those specific challenges? Managers can invest in growing their internal infrastructure. There are some considerations in terms of pure capital outlay to update some of the platforms or systems they use. The technology is available but can be quite expensive to access and the process, resource commitment and timeliness to implement these systems in practice is challenging. The other option is to outsource to a third party. This provides you with access to technology that may be out of your initial capital range and have the ability to move into a more standardised operating model. Historically, during the first generation of middle office outsourcing deals, firms believed their operating model to be a competitive advantage and wanted to leverage providers to run it for them more cheaply. We see that evolving as asset managers now want to use a standard model that runs globally and at scale. There is no competitive advantage in matching a trade or processing a corporate action.

Utilising those service provider frameworks, standards and best practice workflows allows managers to focus on their strategic plans and benefit from the experience of external service providers. However, they must consider third party oversight and how to make the process efficient. When outsourcing, managers don’t want to be in a position where they are replicating activity to check that things have been done correctly. There’s a real focus on that exception-based oversight, to ensure that they are not spending time identifying issues but resolving them. By providing clients with the tools and access to be able to identify the important differences, they can focus on resolution and monitoring rather than on identifying or replicating activities to check the work of the provider. From an outsourcing perspective, we’ve had some clients who used basic in-house solutions that could only handle cash for collateral management for example. They’ve looked to us for help, notably in supporting efforts to use securities as collateral. This has freed up a lot of cash balance for them to use elsewhere, and helped them place that cashflow, which was effectively doing nothing, into the fund and into their investment strategy to increase performance.

Contact: Ben Pumfrett, T.+44 0207 653 4364 M.+44 0754 551 3847 RBC Investor & Treasury Services rbcits.com

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SECURITIES FINANCE

THOUGHT LEADERSHIP: BNY Mellon

Proactively engaged

How do you approach the discussion with a prospective or an existing client when it comes to the types of assets that are truly additive and important to securities lending activity? John Fox, BNY Mellon. As I mentioned during the [Americas Beneficial Owners] Roundtable I participated in in March, if we had a saying in our industry, it would be “Not all assets are created equal.” What do I mean by this? If we take a step back, securities lending flips the risk pyramid of investing on its head: the kind of investments that are less attractive for us would be the low-risk profiles, like those in largecap index benchmarks, for instance, or very liquid investment-grade corporate bonds and some types of US Treasuries. But what’s very attractive is small caps, micro caps, ETFs, and certain markets in Asia Pacific and Europe. One thing we like to start with when we speak to a prospect is qualifying what differentiates us in the marketplace – in essence, the unique capabilities that we have as a provider that allow us to outperform our competitors. But once you get through that qualitative “commercial,” as I like to refer to it, what’s going to be most interesting to the beneficial owner or to your client prospect is an estimate of potential revenues. The approach I prefer to take – as opposed to predicting the future – is describing what a certain portfolio or list of securities would have earned in our program over the last 12 months under various scenarios. It’s also important to understand what type of prospective client we are dealing

Spring 2022

with: Is it an ERISA or non-ERISA client, or are they in the ’40 Act or pension fund space? All these things dictate the full extent of the permissibility around cash and non-cash collateral, and then in some cases, may limit who we can lend the securities to. Client flexibility when it comes to options around cash or noncash collateral is something that you have mentioned as well. Can you give some practical examples of how this plays out in practice? I made a point previously around attractive/less attractive types of investments. It’s worth also making it clear that this is a variable proposition: What you think may not be attractive today could very well turn out to be the opposite tomorrow. The most recent example I’ve been giving prospective clients is Asia Pacific, and specifically Korea and Taiwan. Clients may have said in the past that the returns they could get by lending there weren’t worth all the work they need to put in to prove these markets. However, in 2021, Korea and Taiwan securities lending revenues were up 400%. The last thing you want to happen is being in a situation where you’re sitting down with the same prospect or a client and discussing missed opportunities. To prevent that from happening, I like to get them to

approve as much as is permissible given a specific risk profile, and optimize any investment from the start. This way, they’re opening themselves up to all those future opportunities that go hand-in-hand with securities lending as an activity. Another thing we talked about is flexibility, and to use another phrase: A little can mean a lot. For our purposes here, I am talking about non-cash collateral, and the everevolving types of assets a borrower can use for securities lending activity. In the past few years, we have seen exchange-traded funds [ETFs] used as collateral and, more recently, convertible bonds. These things can be very meaningful, particularly when they are first introduced, because there’s an early-to-market revenue premium when you get involved in those trades from the outset. I think it’s important to present to a client or a prospect with the full extent of our corporate policy about what we do within non-cash. In most circumstances, it is indemnified, though in some cases, we can price it differently if there is no interest. In principle, a client would get more advantageous pricing without indemnification. Given that most of the non-cash activity is indemnified, it’s also reasonable to assume that prospects and clients view that as agent risk, and not necessarily their own risk.

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Flexibility. Reliability. Durability.

There’s No Substitute for Certainty. certainty-bnymellon.com

SECURITIES FINANCE

THOUGHT LEADERSHIP: BNY Mellon

But they may run into circumstances where they struggle to reconcile what they do at an enterprise level with what they want to do when it comes to securities lending. For example, if they’re not allowed to invest in convertible bonds as part of their own policy, they may not be allowed to accept convertible bonds as noncash collateral in a securities lending program. Just spending a bit longer on non-cash collateral. Inflation and interest rate conditions are currently challenging and will be for the foreseeable future at least. How do you think this is going to influence the balance between cash and non-cash collateral? Some 15 years ago, before the credit liquidity crisis in 2008, our industry was only about 2% non-cash. Now we are at just under three-quarters non-cash, and it’s continuing to grow. I would also add that the growing use of non-cash is good for industry participants because in most client contractual scenarios, it’s likely that it’s indemnified. The evolution is quicker on the noncash side. In the current regulatory environment, our borrowers are long various types of individual securities, so they would like to make use of those and post them as collateral, as opposed to using cash. That’s probably the most lasting effect of deleveraging, and the balance sheet impacts associated with the credit events 14 years ago. There’s a whole new cost dynamic in the current environment, within our industry, where borrowers want to have options regarding what they can do to facilitate the posting of collateral to agents to help mitigate costs as much as possible. In many cases, it’s not only the types of collateral that they post that determine who they borrow from, but also which agents can take that collateral. Within that, an important piece is the creditworthiness of

Spring 2022

the agents they’re borrowing from, because that is another component about their risk weightings and their capital costs when they engage in securities lending activity. How do you approach the value proposition of securities lending when you’re discussing options with a prospective or existing client? Another important piece is around engagement. I feel it’s very important to stay engaged not only with clients, but also with prospective clients. During the sales cycle, when you’re dealing with a prospect has varying degrees of time, it’s important to note that securities lending, generally speaking, is something that nobody has to do. Engagement is crucial because this dovetails into my earlier point: What is advantageous today or what drives revenues today may or may not drive revenues tomorrow. I made the earlier statement about flexibility and regularly re-evaluating opportunities. A big driver of securities lending revenues historically has been the IPO market. There were far more IPOs in 2021 compared to 2022 so far – the IPO market has come to what is essentially a grinding halt. I think that keeping clients proactively informed of this is very important. The same goes for prospects: Doing multiple estimates at certain periods of time, after they have lapsed, shows them that variability in revenue. This way, when you meet with clients for a performance review or discussion, you have all the facts and the information surrounding performance already. There are no surprises. Ultimately, the message is that securities lending is a way to get an incremental amount of return with what is generally considered to be a very low risk profile. That’s one of the main value propositions, for me. I think the aptitude of institutional, buy-side clients has grown over the last 15 years. That’s reflected in the

fact that our industry has gone from USD7 trillion in available assets around the time of the credit liquidity crisis in 2008 to now almost USD35 trillion. If you had asked me 15 years ago how confident I felt about lendable assets increasing by 500%, I probably would have been unsure. Nowadays, if you take a US ’40 Act fund, for instance – most other fund or asset managers they are competing against are likely already engaged in securities lending. There may be a true opportunity cost by our ’40 Act fund not being engaged, which could affect its performance. If you compare all the funds within that peer group, all things being equal, our fund may lag behind just because they’re not engaged in securities lending. John Fox, Director, Head of Securities Finance Sales & Relationship Management Americas, BNY Mellon John is a Director and Head of Client Relationship Management & Business Development within the Agency Securities Lending group of Securities Finance for the Americas. He is responsible for overall client relationship and business development initiatives and strategies. John has more than 25 years of securities industry experience, with most of those years in the securities lending industry. He joined The Bank of New York in 2003 after eight years with Deutsche Bank (Bankers Trust). His previous responsibilities at Deutsche Bank included managing U.S. Client Services for Securities Lending within the Global Portfolio Management Group. He began his career at First Union Bank, N.A., where he was the Treasury Operations Manager. John received a B.S in Accounting from the University of Scranton. Contact Details: Email: john.t.fox@bnymellon.com

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South Street Securities to target new solutions South Street Securities Holdings (SSSHI) has said the development of new solutions that can be deployed by its traders as well as its clients represents a “key aspect of growth”. By Ramla Soni. Speaking to Global Investor, Anthony Venditti, head of strategic initiatives and sales at South Street Securities, said: “South Street has multiple systems through its financial technology affiliate, Matrix Applications. This not only helps us facilitate our trading and financing business, but also other institutional firms and asset managers. Right now, we are teaching our fixed income systems not only what an equity is, but also important flows around securities lending.” Venditti said South Street is constantly evolving and further explains why Delta One is a particular area of focus for the firm in 2022 and the years ahead. “At South Street, we are a team of experienced professionals that focus not only on credit risk but also term/ gap risk. So, Delta One trading fits into the DNA of South Street. We try to eliminate as much market risk as

we can and hedge our interest rate risk. Our strategy is to create our own supply/demand in names that our clients are active in, helping them access liquidity,” he said. Integrating equity finance into the South Street’s systems and flows is not only critical for the New York-based firm, but also its clients and partners, Venditti believes. “As we enhance our technology and build our business, this will help us be better providers and partners for our clients which is a key growth aspect for us. Although we may have some clients focused on fixed income, at some point they may look to expand just like us. And we’ll be there to support them,” he said. Venditti joined South Street to kickoff the firm’s move into equity finance and help with marketing and capital raising in 2020. Since its establishment, the firm continues to onboard new

South Street has multiple systems through its financial technology affiliate, Matrix Applications. This not only helps us facilitate our trading and financing business, but also other institutional firms and asset managers. Anthony Venditti, head of strategic initiatives and sales at South Street Securities,

Spring 2022

counterparties and joined the Options Clearing Corporation in March 2022. With a commitment to constant improvement, Venditti stated that South Street is looking into new initiatives to help facilitate clients electronic capabilities. “We have been spending a fair amount of time and money to make our US securities lending business more electronic and low touch. Headcount is a huge driver of costs and if we deploy strong technology with a few great traders that puts us at a huge advantage going forward,” he said. Looking ahead, South Street is seeking to expand its client and asset base, and increase partnerships with technology firms specialised in risk, credit, onboarding and anti-money laundering, among other areas. “We are currently looking for strategic partners in different technologies. When we invest in them it’s because we believe in their vision and management team. Plus, it helps us diversify into other assets, and expand our clients and/or balance sheet,” Venditti stated. In March, SSSHI invested an undisclosed amount in Kayenta, a hedge fund for treasury services platform. The capital will be used to expand research and development resources, and accelerate product development tailored to the needs of Kayenta’s hedge fund clients, Venditti explained

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SECURITIES FINANCE

SOUTH STREET SECURITIES HOLDINGS

SECURITIES FINANCE

SOUTH STREET SECURITIES HOLDINGS

Our investment in Digital Prime gives our firm and clients a clear view of all their positions, cash and collateral movements within a secure digital custodial environment. Investing in technologies that help us and our clients puts SSSHI in a unique position. “We are excited to partner with Kayenta. They are a great complement to our existing business, and we believe we can provide value to their platform on both the fixed income and repo space. We are confident in the Kayenta team and this should be a win-win for both sides,” he said. In April, SSSHI also announced an investment in Digital Prime Technologies, an innovative provider of turnkey, digital prime brokerage solutions for financial institutions. “Our investment in Digital Prime gives our firm and clients a clear view of all their positions, cash and collateral movements within a secure digital custodial environment. Investing in technologies that help us and our clients puts SSSHI in a unique position. I like to say we are a ‘technology company with a balance sheet’ instead

of a ‘trading company with good technology’,” Venditti said. SSSHI is a mid-sized firm with technology and operational expertise that stands out, he explained. “We help other smaller to mid-sized firms, along with the larger ones, navigate new markets and help them with technology build-outs. So, we are a flexible and make our systems costeffective and advantageous for others.” Beyond the technology and trading platforms, South Street also has the ability to service clients’ fixed income portfolios and flows. “We believe this is a major differentiator that sets us apart from other technology providers. We see the operational outsourcing space as a great growth opportunity for us. It fits in well with what we are doing in the securities lending space. There are a

James Tabacchi, president and chief executive officer, South Street Securities Holdings (SSSHI)

Spring 2022

lot of new players in the robo/retail/ digital brokerage space that need help. So, we believe we are positioned to outsource some of the funding business and operations that goes along with it. “This helps keep costs and headcount down for new entrants that want to settle and clear in the US market. Instead of having to clear through other firms, sometimes it is better to open your own broker dealer to save expenses and maintain your client’s business flow,” Venditti concluded. Headquartered in New York, SSSHI is a Financial Industry Regulatory Authority member broker dealer primarily focused on the financing of a matched book of US government and agency repurchase agreements, along with equities securities lending. South Street Securities, along with its affiliates South Street Securities Holdings and Matrix Applications, offers a suite of products and services in support of fixed income trading and securities lending. With an increasing interest from UK clients in 2017, South Street Securities registered its UK representative office. The company is headed by president and chief executive officer James Tabacchi who directly oversees all aspects of the business, including strategy, credit, market and liquidity risk, infrastructure, technology and clearing, compliance, finance, accounting and controls. In 2000, he raised the venture capital and founded South Street as an independent repo broker dealer and began building and expanding the franchise of products. Prior to founding South Street, Tabacchi was at Citicorp/Citibank from 1980. Over a period of 20 years he worked in various customer interface and business head positions within the investment, corporate, and consumer banking divisions.

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ISLA 29th Annual Securities Finance & Collateral Management Conference 6 - 8 JUNE 2022 | VIENNA MARRIOTT HOTEL

For all conference information: events@islaemea.org | www.islaemea.org

BENEFICIAL OWNERS SURVEY 2022

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Beneficial Owners

O B A w en va ne e ila rs fic bl G ial e ui N de O W

Survey 2022 Including reports and video coverage European Beneficial Owners Roundtable

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Beneficial Owners

Guide 2022

US Beneficial Owners Roundtable

To access the Global Investor Beneficial Owners Guide 2022 go to www.globalinvestorgroup.com

BENEFICIAL OWNERS SURVEY 2022

J.P.Morgan wins global recognition G lobal Investor/ISF’s Beneficial Owners Survey returned for its 2022 edition to recognise yet again the leading custodial lenders and third-party agent lenders globally. The survey asked beneficial owners from around the world to rate the performance of their agent lenders across areas such as collateral management, market coverage, reporting transparency and programme customisation. This year five firms qualified in the lender categories. J.P. Morgan returned again this year to win the global weighted category, winning the top prize in all three regions. Deutsche Agency Lending also made an appearance in the EMEA unweighted rankings. Goldman Sachs was recognised as top in the Americas unweighted class, with a score that placed it in first place when it comes to the global average rating.

J.P. Morgan recognised globally The US investment bank took the top prize again this year in the weighted category, scoring the highest global totals in Asia Pacific (APAC), Americas and Europe, the Middle East and Africa (EMEA). Its global average rating across the three regions, at 6.72, was slightly down on last year’s (6.76) but up from the 6.50 seen in 2020. The bank scored 6.42 in the Asia Pacific weighted list – an improvement on 2021’s 6.41 - making it the top-rated lender in that region as well as the only lender to qualify there. A score of 7.1 meant the lender also came out top in Americas, an improvement on last year’s second spot (with a rating of 6.76). A survey respondent based in the region

noted: “Our assigned client service team is top notch; outstanding.” A score of 6.65 in EMEA means the US lender was joint first alongside Deutsche Agency Lending. In the unweighted category, J.P. Morgan had the highest unweighted scores in EMEA (6.85) and APAC (7.00), the latter flat since 2020. It continued boosting its score in the Americas, to 6.65 (2021: 6.46) though took the second spot in the region behind Goldman Sachs Agency Lending. Overall, an average score of 6.83 meant the bank continued its upward trend (2021: 6.8 and 2020: 6.69), also slightly behind Goldman Sachs Agency Lending. On a global total basis, it came out first (20.5), as it did in 2021. As a custodial lender, J.P. Morgan was one of only two firms to qualify, and secured the top spots on both an unweighted (20.67 as a global total) and weighted (19.82) basis. It achieved the highest scores in EMEA, Americas and Asia Pacific. It scored top marks with respondents in all the service categories in the weighted category. In the unweighted part of the survey, it was recognised for its Market Coverage in both emerging and developed markets, its Programme Customisation, the Provision of Market and Regulatory Updates, and its Lending Programme Parameter Management. J.P. Morgan also received recognition as top agent lender in the Americas, in the weighted category, which also enabled it to get the best average score. It received first place in the weighted agent lender service categories, gaining recognition for Collateral Management, Engagement on Corporate Actions, Provision of Market and Regulatory Updates, and Settlement and Responsiveness.

RESPONDENTS: This year’s survey gathered 61 responses across a number of asset-holding firms. Just over half (54%) of these were asset managers or mutual funds, which is down on last year’s representation (66%). Respondents also comprised public (18%) and private (5%) pension funds, insurance companies (11%) and central banks (7%). Half the firms (30) that responded reported assets under management (AuM) valued at more than $100bn, while onethird had assets between $10bn and $25bn. The remainder had AuM under $10bn. Most respondents (41) revealed they use only one single provider. Ten used two providers, and the remainder worked with three or more.

Spring 2022

Like 2021 results, respondents showed a differing appetite for lending. The same number of firms (10) said they had made available more than $100bn and between $50bn$100bn of their assets. Some 22 firms lent between $10bn and $50bn. Nineteen firms had less than $10bn of their assets out on loan. When it comes to the value of the assets on loan, just over one-third (21) of firms lent out less than $1bn at any point in time. At the higher end of the scale, no firms lent over $100bn while only two had between $80bn and $90bn out at one time. Some 28 firms had between $1bn and $10bn on loan typically out on loan at any given point in time. The remainder were divided between $10bn and $80bn on loan.

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BENEFICIAL OWNERS SURVEY 2022

Goldman Sachs Agency Lending: notable improvements The US firm improved its performance in 2022, coming out top in the Americas with a score of 6.89 in the unweighted category and top in terms of the global average (6.84). In comparison, it was in third place in 2021. It came second in EMEA (6.79), behind J.P Morgan. Overall, Goldman Sachs Agency Lending’s global total of 13.68 in the unweighted section was an improvement on 2021, and put it in second place. It scooped up the top prize in several unweighted individual service categories, including Collateral Management, Engagement on Corporate Actions, Income Generated and Risk Management. A survey respondent from the Americas noted they had received “excellent client service [from Goldman Sachs Agency Lending]”. In the weighted section, Goldman Sachs Agency Lending had the second highest global average of 6.10, which was down on 2021 but a significant improvement on 2020’s 5.87. It secured a score of 6.31 in the Americas weighted list, which was down on last year’s 6.55. Its 2022 rating of 6.88 in EMEA

was higher than last year’s (5.74) though the lender was third out of its peer group in this region. On a global total level, its score of 12.19 was slightly down on last year’s (12.29) – the bank maintained its second place again this year. It was recognised as top agent lender in the unweighted category, across EMEA, APAC and the Americas, securing a top global score of 13.68. It was one of three firms, alongside eSecLending and Deustche Agency Lending, to qualify in all regions. It posted equally as good results in the agent lender service categories, securing wins in most areas including Collateral Management, Income Generated, and Market Coverage (Emerging Markets and Developed Markets). In the weighted space, it came first in EMEA and globally, but conceded the first spot to J.P. Morgan in the Americas. Deutsche Agency Lending: continued strong performance in EMEA The European lender qualified in both the Americas and EMEA regions, and maintained its top rating in EMEA in the weighted category, with a score of 6.65 (2021: 6.72), though

ALL LENDERS (UNWEIGHTED) COMPANY

GLOBAL TOTAL

AVERAGE

Deutsche Agency Lending

EMEA 6.37

AMERICAS

6.47

ASIA PACIFIC

12.84

6.42

eSecLending

6.35

6.42

12.77

6.39

Goldman Sachs Agency Lending

6.79

6.89 13.68

6.84

JPMorgan

6.85

6.65

7.00

20.50

6.83

RBC Investor & Treasury Services

6.20

6.44

12.64

6.32

ALL LENDERS SERVICE CATEGORIES (UNWEIGHTED) COMPANY

COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT Deutsche Agency Lending

6.55

6.36

6.40

eSecLending

6.09 6.25

6.50

Goldman Sachs Agency Lending

6.91

6.92

6.82

6.83

JPMorgan

6.80

6.73

6.87

RBC Investor & Treasury Services

6.27

6.00

6.25

6.27

MARKET COVERAGE DM

MARKET COVERAGE EM

PROGRAMME CUSTOMISATION

PROVISION OF MARKET & REGULATORY UPDATES

COMPANY

Deutsche Agency Lending

6.30

6.55

6.27

eSecLending

6.30

6.42

6.55

6.30

Goldman Sachs Agency Lending

6.83

6.75

6.91

6.67

JPMorgan

6.87

6.77

6.93

6.87

RBC Investor & Treasury Services

6.25

6.30

6.45

6.27

COMPANY

RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS Deutsche Agency Lending

6.73

6.45

6.27

eSecLending

6.75

6.42

6.33

6.25

Goldman Sachs Agency Lending

6.83

6.92

6.83

JPMorgan

7.00

6.67

6.80

6.67

RBC Investor & Treasury Services

6.92

6.33

6.42

Spring 2022

6.36

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BENEFICIAL OWNERS SURVEY 2022

had to share the spot with J.P. Morgan this year. It was ranked fourth in terms of weighted global average (5.88) and global total (11.75). It made an appearance in the unweighted rankings this year in the Americas, and was third globally by unweighted global averages with a score of 6.42, reflecting a global total of 12.84. It was in the top three in EMEA (6.37) and Americas (6.47). The lender scored favourably in the weighted Service Categories, coming out in the top three in most of them including for Income Generated, and Relationship and Risk Management. “Deutsche Agency Lending has been a great agent lender for us [over the past few years],” said one respondent. “Specifically over this past year, we have been happy with the increased earnings, client service, and program parameter management. Deutsche Agency Lending has really done a great job for us over the years including this past year and always goes above and beyond with client service.” The European bank also received nods on the agent lender side, and was awarded top place in EMEA in the weighted category, and second place in the unweighted category. It also finished in second place in terms of global totals.

eSecLending: top 3 results The lending firm qualified in both EMEA and Americas, and was in the top three global totals in the weighted category (12.06), slightly down on 2021 (12.09) but up on 2020’s total of 11.66. It had the third highest average total in this category (6.03), a level consistent with what was seen in 2021. eSeclending scored 6.42 in the Americas unweighted category, down on last year’s level but up significantly from 6.02 in 2020. On a global total basis, it scored 12.77 The firm, which a respondent said provided “excellent customer service,” was also recognised for its performance in unweighted Collateral Management, Lending Programme Parameter Management, and Provision of Market and Regulatory Updates (third in all categories), and Market Coverage in Emerging and Developed Markets (joint third in both). In the weighted category, it had additional nods for Relationship Management (second) and Income Generated (third). The firm had the second highest global total of 12.06 (behind J.P. Morgan) in the Third-Party Agent Lenders weighted category based on scores in EMEA and the Americas.

ALL LENDERS (WEIGHTED) COMPANY

EMEA

AMERICAS

ASIA PACIFIC

GLOBAL TOTAL

AVERAGE

Deutsche Agency Lending

6.65

5.10

11.75

5.88

eSecLending

5.77

6.29

12.06

6.03

Goldman Sachs Agency Lending

5.88

6.31

12.19

6.10

JPMorgan

6.65

7.10

20.17

6.72

RBC Investor & Treasury Services

4.39

6.04

10.43

5.22

6.42

ALL LENDERS SERVICE CATEGORIES (WEIGHTED) COMPANY

COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT Deutsche Agency Lending

6.16

8.47

5.25

eSecLending

6.20 8.95

5.65

Goldman Sachs Agency Lending

6.72

4.11

9.38

5.73

JPMorgan

7.34

4.48

10.23

6.35

RBC Investor & Treasury Services

5.59

3.34

7.93

4.81

MARKET COVERAGE DM

MARKET COVERAGE EM

PROGRAMME CUSTOMISATION

PROVISION OF MARKET & REGULATORY UPDATES

COMPANY

Deutsche Agency Lending

3.82

5.09

3.31

eSecLending

4.03

5.41

3.76 3.70

2.41

Goldman Sachs Agency Lending

4.21

2.57

5.60

JPMorgan

4.65

2.74

6.20

4.21

RBC Investor & Treasury Services

3.54

2.25

4.79

3.20

COMPANY

RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS Deutsche Agency Lending

6.63

6.10

8.68

7.15

7.11

6.44

9.36

7.53

Goldman Sachs Agency Lending

6.99

6.66

9.81

7.92

JPMorgan

7.94

7.19

10.69

8.50

RBC Investor & Treasury Services

6.55

5.73

8.42

6.92

eSecLending

Spring 2022

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BENEFICIAL OWNERS SURVEY 2022

RBC Investor & Treasury Services: continued momentum RBC Investor & Treasury Services scored a global unweighted average of 6.32, which is slightly down on last year’s 6.34. The Canadian’s bank global unweighted total was was 12.64, down on 2021’s figure but on par with results seen in 2020. The lender had an unweighted score in EMEA of 6.20, which was up on last year’s figure of 6.17 though its figure in the Americas (6.44) was a slight drop. In the weighted section, RBC Investor & Treasury Services had a global average of 5.22, up on last year’s

5.02 last year’s 5.17, and a global total of 10.43, also up on previous year figures. The lender scored 6.04 in the weighted Americas section, up for the second year running (2021: 5.77). RBC Investor & Treasury Services was one of only two lenders to qualify in the Custodial Lender categories, alongside J.P. Morgan. Respondents viewed Relationship Management and Risk Management as two two of the bank’s key strengths in the unweighted Service Categories.

CUSTODIAL LENDERS (UNWEIGHTED) COMPANY

EMEA

AMERICAS

ASIA PACIFIC

GLOBAL TOTAL

AVERAGE

JPMorgan

6.85

6.82

7.00

20.67

6.89

RBC Investor & Treasury Services

6.10

6.44

12.54

6.27

CUSTODIAL LENDERS SERVICE CATEGORIES (UNWEIGHTED) COMPANY

COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT JPMorgan

6.85

6.92

6.77

6.92

RBC Investor & Treasury Services

6.20

5.90

6.18

6.20

COMPANY

MARKET COVERAGE DM

MARKET COVERAGE EM

PROGRAMME CUSTOMISATION

PROVISION OF MARKET & REGULATORY UPDATES

JPMorgan

6.92

6.46

7.00

6.92

RBC Investor & Treasury Services

6.27

6.33

6.50

6.30

COMPANY

RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS JPMorgan

7.00

6.69

6.85

RBC Investor & Treasury Services

6.91

6.36

CUSTODIAL LENDERS (WEIGHTED) COMPANY

EMEA

AMERICAS

ASIA PACIFIC

GLOBAL TOTAL

JPMorgan

6.65

6.75

6.42

19.82

AVERAGE 6.61

RBC Investor & Treasury Services

4.41

6.04

10.45

5.23

CUSTODIAL LENDERS SERVICE CATEGORIES (WEIGHTED) COMPANY

COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT JPMorgan

7.17

4.43

9.97

6.21

RBC Investor & Treasury Services

5.66

3.38

8.02

4.87

COMPANY

MARKET COVERAGE DM

MARKET COVERAGE EM

PROGRAMME CUSTOMISATION

PROVISION OF MARKET & REGULATORY UPDATES

JPMorgan

4.55

2.58

6.08

4.12

RBC Investor & Treasury Services

3.63

2.31

4.92

3.28

COMPANY

RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS JPMorgan

7.69

6.99

10.43

8.50

RBC Investor & Treasury Services

6.68

5.87

8.53

7.02

Spring 2022

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BENEFICIAL OWNERS SURVEY 2022 AGENT LENDERS (UNWEIGHTED) COMPANY

EMEA

AMERICAS

GLOBAL TOTAL

AVERAGE

Deutsche Agency Lending

6.37

6.47

12.84

6.42

eSecLending

6.35

6.42

12.77

6.39

Goldman Sachs Agency Lending

6.79

6.89

13.68

6.84

JPMorgan 6.48 6.48

AGENT LENDERS (WEIGHTED) COMPANY

EMEA

AMERICAS

GLOBAL TOTAL

Deutsche Agency Lending

6.65

5.10

11.75

AVERAGE 5.88

eSecLending

5.77

6.29

12.06

6.03

Goldman Sachs Agency Lending

5.88

6.31

12.19

6.10

JPMorgan 7.45 7.45

AGENT LENDERS SERVICE CATEGORIES (UNWEIGHTED) COMPANY

COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT Deutsche Agency Lending

6.55

6.33

6.36

6.40

eSecLending

6.09

6.33

6.25

6.50

Goldman Sachs Agency Lending

6.91

6.92

6.82

6.83

JPMorgan

6.50

6.25

6.75

COMPANY

MARKET COVERAGE DM

MARKET COVERAGE EM

PROGRAMME CUSTOMISATION

PROVISION OF MARKET & REGULATORY UPDATES

Deutsche Agency Lending

6.30

6.00

6.55

6.27

eSecLending

6.30

6.42

6.55

Goldman Sachs Agency Lending

6.83

6.75

6.91

6.67

JPMorgan

6.50 6.75

6.50

COMPANY

RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS Deutsche Agency Lending

6.73

6.45

6.27

eSecLending

6.75

6.42

6.33

6.36 6.25

Goldman Sachs Agency Lending

6.83

6.92

6.83

JPMorgan

7.00

6.50

6.00

AGENT LENDERS SERVICE CATEGORIES (WEIGHTED) COMPANY

COLLATERAL ENGAGEMENT INCOME LENDING PROGRAMME MANAGEMENT ON CORPORATE GENERATED PARAMETER ACTIONS MANAGEMENT Deutsche Agency Lending

6.16

3.62

8.47

5.25

eSecLending

6.20

4.09

8.95

5.65

Goldman Sachs Agency Lending

6.72

4.11

9.38

5.73

JPMorgan

7.93

4.83

10.72

7.10

COMPANY

MARKET COVERAGE DM

MARKET COVERAGE EM

PROGRAMME CUSTOMISATION

PROVISION OF MARKET & REGULATORY UPDATES

Deutsche Agency Lending

3.82

2.20

5.09

3.31

eSecLending

4.03

2.41

5.41

3.76

Goldman Sachs Agency Lending

4.21

2.57

5.60

3.70

JPMorgan

4.99 6.85

4.52

COMPANY

RELATIONSHIP REPORTING RISK SETTLEMENT MANAGEMENT TRANSPARENCY MANAGEMENT AND RESPONSIVENESS Deutsche Agency Lending

6.63

6.10

8.68

7.15

7.11

6.44

9.36

7.53

Goldman Sachs Agency Lending

6.99

6.66

9.81

7.92

JPMorgan

9.00

7.93

11.57

8.66

eSecLending

Spring 2022

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BENEFICIAL OWNERS SURVEY 2022

Global Investor/ISF Beneficial Owners Survey 2022 METHODOLOGY: number of responses to qualify in each: six in the Americas, five responses in Europe, Middle East and Africa (Emea) and four in Asia Pacific. To qualify globally, a lender must qualify in at least two regions. Custodial and third-party agent lender tables Ratings of lenders acting in a custodial or third-party agent lender capacity are recorded in separate tables. The respondent is asked to define their relationship with the lender: custodial, agent or both. If the relationship involves both forms of arrangement, the response counts for both the custodial and agent lender tables. Therefore, some responses will be included in both the custodial and third-party agent lender tables. All the scores calculated for overall lenders will be replicated for custodial and third-party agent lenders separately. The qualification criteria are lower for the custodial and agent lender tables compared with overall. To qualify for either the overall custodial and third-party agent lender tables, lenders need four responses in the Americas, four in Emea and three in Asia Pacific.

Beneficial owners are asked to rate the performance of their agent lenders. Respondents are asked to rate their agent lenders across 12 service categories (see below) from one (unacceptable) to seven (excellent). There are two methodologies: unweighted and weighted. Unweighted methodology All valid responses for each agent lender are averaged to populate unweighted tables. All beneficial owners’ responses are given an equal weight, regardless of the size of their lendable portfolio. All categories are given equal weight regardless of how important they are considered to be by respondents. No allowances are made for regional variations. Weighted methodology The weighted table methodology makes allowances for both the size of the respondent’s lendable portfolio and how important the respondents, on average, consider each category to be. An allowance is also made for differences between average scores in each region to make meaningful global averages.

Most improved The agent lender that improved its score by the greatest margin over its equivalent 2021 score is the most improved firm. Agent lenders are ineligible if they did not qualify for the 2021 survey.

Step one – weighting for lendable portfolio: A weighting is generated to reflect to the size of the respondent’s lendable portfolio. Each respondent is put into a quartile depending on its total lendable portfolio. The scores of the respondent are then given a weighting based on this quartile. As the boundaries of each quartile are determined by all the responses received in this year’s survey, the boundaries are unknown until the survey closes. For the purposes of the 2022 survey all Asian responses will be given a weighting of 1. Asian responses will not be included in determining the quartile boundaries. However all Asian responses will be subject to step two – see step 2 below. Criteria AuM in lowest quartile AuM in middle two quartiles AuM in the top quartile

Service categories Respondents are asked to rate each of their providers from one to seven across 12 service categories. The ratings of respondents for each service category are averaged to produce the final score for each provider. The service categories are: • Income generated versus expectation • Risk management • Reporting and transparency • Settlement and responsiveness to recalls • Engagement on corporate action opportunities • Collateral management • Relationship management/client service • Market coverage (developed markets) • Market coverage (emerging markets) • Programme customisation • Lending programme parameter management • Provision of market and regulatory updates To qualify for each service category table, the lender needs the same number of responses to qualify for the corresponding main table; i.e., to qualify for an overall, custodian or agent lender service category the lender must qualify in two of the three regions (for example, five responses for that category in the Americas and four in Emea). A lender can qualify in some categories and not others – it does not have to qualify globally for all service categories to be any particular service category.

Weighting 0.7 1 1.3

Step two – weighting for importance: An additional allowance is made for how important beneficial owners consider each category to be. This is done to acknowledge the fact that beneficial owners consider some categories to be more important than others. Respondents are asked to rank each service category in order of how important the function is to them. An average ranking is then calculated for each of the twelve categories (11= highest ranking, 0 = lowest). This number is then divided by 5.5 to give a weighting within a theoretical band between 0 and 2, with an average of one. Again, basing weights around one is done to preserve comparability with unweighted scores. To illustrate, if every respondent considers category X to be the most important it would get an average rank of 11. This is then divided by 5.5 to provide the weighting for category X, i.e. 11 / 5.5 = 2.

VALID RESPONSES For a response to count for the purposes of qualification, the beneficial owner must rate the lender in no fewer than eight of the 12 service categories (i.e. it can tick n/a in no more than four service categories). It is possible for a lender to qualify globally or regionally without qualifying for all service category tables, if it receives n/a responses for certain categories. For example, it may not offer emerging market coverage and therefore receive a string of n/a ratings in that category but qualify for all other categories, regionally and globally. If a lender receives two or more responses in the same region from the same beneficial owner, an average of the ratings will be taken and it is considered to be one response for qualification purposes. If a lender receives two or more responses from the same client in different regions (e.g. pension scheme X rates lender Y in Emea and the Americas) the responses are not averaged and are counted as separate responses for qualification purposes.

TABLES AND SCORES Overall tables The overall table contains all responses for a lender regardless of its relationship with the beneficial owner, whether custodial or agent. The following scores are calculated: separately for each region, a global total, a global average and for each service category. Regional scores are the average of all responses from beneficial owners based in that region (it is the location of the beneficial owner, not the lender, that is the relevant). There are three regions. A lender must receive a different minimum

Spring 2022

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