Over 140 stock lending, repo and collateral market participants met in Sydney on July 4 to discuss global securities finance trends and Australia’s position in the wider marketplace.
Here are a few takeaways from the event:
People have long memories when it comes to securities lending in Australia, but industry executives feel it is incumbent on them to dispel some of the myths and bad press.
During and after the global financial crisis, media attention often focused on short selling. However, panellists agreed that the mismanagement of cash collateral (rather than short selling or securities lending) was the main cause of concern.
Australian funds, particularly superfunds, have re-entered the securities lending space in recently years on a conservative basis in regards to the management of cash collateral. However, they seek ongoing education and this is where consultants and agent lenders have a role to play.
Experts agreed that the capabilities of lending agents have changed and more open, transparent discussions are occurring facilitated by online and transparent reporting.
Most funds know what lending involves and understand the risks/rewards on offer, and bespoke programmes capable of providing unique solutions to clients are the order of the day.
Using a third-party agent isn’t all that common in Australia’s securities lending market at present and the majority of lending is via custodian banks.
Natalie Floate, Head of Market and Financing Services Asia Pacific, BNP Paribas, chaired this year’s Global Investor/ISF Australia Masterclass.
Floate is also the chair of local trade body the Australian Securities Lending Association (ALSA). She noted that stock lending isn't the flashy side of a trading floor at an investment bank or custodian.
“We're there to service our clients, support and enhance their investment strategies and manage, mitigate risk,” she said.
Natalie Floate delivers the opening address at the 2018 Australia Securities Finance Masterclass
Requirements for high quality liquid assets (HQLA) are growing and many Australian funds today sit on large quantities of such assets. For example large portions of US treasuries would be immediately utilised in the market via agent lenders or directly via broker-dealers if available for loan.
But there was still some uncertainty from asset owners as to what drives demand for securities lending. One prime brokerage executive said asset owners, if unsure on what was driving demand, should sit down with agents and brokers to demystify why banks are looking for certain assets, noting that it was their responsibility to educate, inform.
In regards to fixed income demand is currently driven by regulation with Liquidity Coverage Ratio (LCR) requirements driving HQLA demand; Net Stable Funding Ratio Requirements (NSFR) driving terms of six months plus for loans with options to extend.
These regulatory changes are giving long term investors opportunities to pick up incremental returns – which are increasingly important for performance in a low yield environment.
The role of collateral is becoming more important, and the role of tri-party collateral agents was also highlighted as an increasingly key element to managing demand.
Not typically used in Australia which has been dominated by bi-lateral collateral management – the use of tri party agents is starting to increase. It was noted that work being done by the International Securities Lending Association (ISLA) in Europe would be important for asset owners in the region to be aware of e.g. pledge structures.
Having the ability to take equity collateral, go into term, use CCPs and awareness of peer-to-peer opportunities are also areas asset owners should look at, panellists agreed.
There are also a number of other avenues asset owners can take in their securities lending arrangements, such as direct exclusives, scrip optimisation and pay to holds.
“Dealers have become quite sophisticated when it comes to optimising internal inventory and dealing with lenders,” said one prime brokerage executive. “Beneficial owners need to understand the changing dynamics and have the flexibility to capitalise on new opportunities either directly or via their agents.”
Australia’s repo market has roughly doubled in size since 2009 and there has been a large increase in activity from non-resident firms – locally the pension funds and asset managers are not typically invested in the domestic repo market. That said, infrastructure and sophistication is developing.
ASX Collateral is the only live, fixed income, tri-party repo securities lending and collateral management service provider in Australia that mobilises collateral directly within the CSD.
Like Europe’s repo market, Australia has seen more volatility and elevated rates at quarter ends.
New entrants are appearing in the repo market and benefiting from it amid a low rate environment - the challenge is getting smaller funds involved.
One panellist suggested a centrally cleared repo platform would enable smaller managers to move in and ease fluctuations in pricing.
Robert Antelmann, vice president, DataLend delivered a presentation on securities finance data.
ASX-listed mining company Galaxy Resources is the highest revenue generating stock from the securities lending standpoint and the impact of resource issues, particularly Lithium producers had produced the majority of special trades in the market for 2018.
In Australia and indeed globally, Antelmann noted that balances were growing leading to more revenue, term trades are in focus, fixed income balances were on the increase and the use of non-cash collateral was continuing to grow.
Looking specifically at Asia Pacific – he noted it isn’t the largest region from a revenue generation perspective, but it is reporting the highest average level of fees and the largest quarter-on-quarter percentage increases in fees/returns.
DataLend's Robert Antelmann delivers a presentation at the 2018 Australia Securities Finance Masterclass
All market participants emphasised the importance of technology to optimise returns, better manage risk and deliver greater transparency for clients and the market.
Connectivity and the use of live data was also discussed as key e.g. trading screens receiving intraday collateral repricing, the ability to simulate potential loans for value at risk (VaR), capital costs etc. Technology is freeing up time to focus on higher revenue generating trades and unique algorithms are helping to automate wider trading activity, not just general collateral (GC).
So what was the theme of the day?
There were a number of asset owners in the room – super funds, asset managers, insurers and banks. But the majority of questions from them seemed to occur during the coffee breaks and lunch. And what was the common theme?
"Asset owners were curious as to what their peers were doing (or not doing), prime brokers were wanting more assets and flexibility and wondering if going directly to the funds was the way to achieve this, but neither of them saw a model without the agent in the middle in some form," said BNP Paribas' Floate. "And this was the key theme – flexibility.
She added: "Not everyone would have the same risk profile, investment objectives or be impacted in the same way by the same regulations. Asset owners didn’t want to not lend, but wanted to ensure they were lending in a manner suitable for their funds and underlying clients. Technology, transparency, Asia Pacific having the highest fee levels and an increased level of awareness on the benefits of securities lending – all of this had people talking and was one of the reasons why the event had a record attendance this year."
Over 140 stock lending, repo and collateral market participants met in Sydney on July 4