Shaping the future
28 May 2019
Donato D鈥橢ramo of RBC I&TS, and president of CASLA, shares his insights on how participants can be best-positioned to extract value in an environment of rapid change
Image: Shutterstock
Maximising value from within
Adding value to a securities lending portfolio and improving efficiency are increasingly important and can take many forms. For example, structured lending on a term basis, collateral flexibility where permissible, corporate action optimisation and ensuring effective lending within restrictive security conditions. Given the wide range of options and strategies on the table, the first line of defence in optimising a lending portfolio is setting the right programme parameters.
In the search for efficiency, there are many avenues to pursue. Across the industry, the trend of growing fixed-income balances continues to present opportunities to beneficial owners. At the same time as the demand for high-quality liquid assets increases due to regulated capital ratio rules such as the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), beneficial owners can potentially capture additional alpha by lending for defined periods, at premium fees. Furthermore, term lending of assets allows full rights of substitution without impacting investment activity.
These trends go hand-in-hand with collateral flexibility, an essential element for this type of structured transaction. Higher willingness to accept collateral, such as equity against term loans, widens the scope of demand from borrowers. Collateral flexibility is not only important for term lending but may also lead to higher loan balances, imperative in capturing value in today鈥檚 environment.
A successful securities lending programme is one that is built to optimise with appropriate risk parameters set by the beneficial owner in consultation with the agent lender.
The role of data in empowering beneficial owners
Today, data-enabled tools are helping to fulfil regulatory requirements, but we鈥檙e also increasingly using data to support strategic decision-making, as it allows us to draw on much deeper insights. We have certainly come a long way in the areas of data consolidation and transparency capabilities since the pre-crisis period.
Beneficial owners who are looking to their lending programmes as a means to both offset cost and extract alpha will need to ensure their agent lender can provide the data that is required to help make those strategic decisions. Data enablement can also deliver tangible insights into the cause-and-effect relationship illuminating how lending revenues are achieved, especially in an intrinsic value-only lending relationship.
Emerging markets on the rise
I see emerging markets as another area of opportunity in the coming months, whether that is expanding the range of assets to lend, or looking towards new markets as additional borrowing avenues.
Emerging-market equities were a key driver of lending revenue last year, and recent research from the World Federation of Exchanges has indicated that securities lending capability was the driving force behind an increase in portfolio investment in these markets specifically. For this year and beyond, I expect that leveraging emerging markets will continue.
European regulations on the horizon
Upcoming regulations within the EU are another focus for change, as the European Commission formalised its path for the adoption of the Securities Financing Transactions Regulation (SFTR) in December 2018. The regulations aim to increase transparency and reduce the risks associated with entering collateral arrangements. Article 4 of SFTR imposes significant changes, both in terms of risk and cost, on firms that will be required to comply with the new reporting regime. These changes coincide with other material regulatory changes required for firms, and their clients and counterparts to comply with, including the Central Securities Depository Regulation.
The implementation of SFTR, set for Q2 2020, will give rise to technology infrastructure development across all participants, which may be met in-house, or vendor-sourced. SFTR vendors will have a significant responsibility to ensure interoperability within the SFTR ecosystem.
D鈥橢ramo cautions that participants cannot assume their counterparts and service providers will have SFTR solutions in place. As a result, participants who intend to comply should have an implementation strategy in place. On balance, the implementation challenges presented by SFTR are offset by the SFTR鈥檚 objective to promote a more granular level of transparency across the securities lending industry.
Navigating a landscape of continuous change
There are also unknowns. Specifically, the potential impact of the global economy and the ever-changing geopolitical landscape.
Taking advantage of data insights and new technology will help to expedite strategic decision-making which will, in turn, further optimise performance and mitigate risk. Here, an agent lender鈥檚 expertise can help guide and inform clients in order to best utilise opportunities within the securities lending market.
Adding value to a securities lending portfolio and improving efficiency are increasingly important and can take many forms. For example, structured lending on a term basis, collateral flexibility where permissible, corporate action optimisation and ensuring effective lending within restrictive security conditions. Given the wide range of options and strategies on the table, the first line of defence in optimising a lending portfolio is setting the right programme parameters.
In the search for efficiency, there are many avenues to pursue. Across the industry, the trend of growing fixed-income balances continues to present opportunities to beneficial owners. At the same time as the demand for high-quality liquid assets increases due to regulated capital ratio rules such as the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR), beneficial owners can potentially capture additional alpha by lending for defined periods, at premium fees. Furthermore, term lending of assets allows full rights of substitution without impacting investment activity.
These trends go hand-in-hand with collateral flexibility, an essential element for this type of structured transaction. Higher willingness to accept collateral, such as equity against term loans, widens the scope of demand from borrowers. Collateral flexibility is not only important for term lending but may also lead to higher loan balances, imperative in capturing value in today鈥檚 environment.
A successful securities lending programme is one that is built to optimise with appropriate risk parameters set by the beneficial owner in consultation with the agent lender.
The role of data in empowering beneficial owners
Today, data-enabled tools are helping to fulfil regulatory requirements, but we鈥檙e also increasingly using data to support strategic decision-making, as it allows us to draw on much deeper insights. We have certainly come a long way in the areas of data consolidation and transparency capabilities since the pre-crisis period.
Beneficial owners who are looking to their lending programmes as a means to both offset cost and extract alpha will need to ensure their agent lender can provide the data that is required to help make those strategic decisions. Data enablement can also deliver tangible insights into the cause-and-effect relationship illuminating how lending revenues are achieved, especially in an intrinsic value-only lending relationship.
Emerging markets on the rise
I see emerging markets as another area of opportunity in the coming months, whether that is expanding the range of assets to lend, or looking towards new markets as additional borrowing avenues.
Emerging-market equities were a key driver of lending revenue last year, and recent research from the World Federation of Exchanges has indicated that securities lending capability was the driving force behind an increase in portfolio investment in these markets specifically. For this year and beyond, I expect that leveraging emerging markets will continue.
European regulations on the horizon
Upcoming regulations within the EU are another focus for change, as the European Commission formalised its path for the adoption of the Securities Financing Transactions Regulation (SFTR) in December 2018. The regulations aim to increase transparency and reduce the risks associated with entering collateral arrangements. Article 4 of SFTR imposes significant changes, both in terms of risk and cost, on firms that will be required to comply with the new reporting regime. These changes coincide with other material regulatory changes required for firms, and their clients and counterparts to comply with, including the Central Securities Depository Regulation.
The implementation of SFTR, set for Q2 2020, will give rise to technology infrastructure development across all participants, which may be met in-house, or vendor-sourced. SFTR vendors will have a significant responsibility to ensure interoperability within the SFTR ecosystem.
D鈥橢ramo cautions that participants cannot assume their counterparts and service providers will have SFTR solutions in place. As a result, participants who intend to comply should have an implementation strategy in place. On balance, the implementation challenges presented by SFTR are offset by the SFTR鈥檚 objective to promote a more granular level of transparency across the securities lending industry.
Navigating a landscape of continuous change
There are also unknowns. Specifically, the potential impact of the global economy and the ever-changing geopolitical landscape.
Taking advantage of data insights and new technology will help to expedite strategic decision-making which will, in turn, further optimise performance and mitigate risk. Here, an agent lender鈥檚 expertise can help guide and inform clients in order to best utilise opportunities within the securities lending market.
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