Market participants met in London on March 22 to discuss attitudes towards securities lending, demand drivers, regulation and the outlook for the market.
- Andrew Neil, securities finance editor, Global Investor Group
- Graeme Perry, securities lending client management and solutions, BNP Paribas Securities Services
- Matt Chessum, investment dealer, Aberdeen Standard Investments
- James Day, managing director, head of securities finance – EMEA, BNY Mellon
- Jessica Hynes, head of custody consulting, Mercer Sentinel Europe
- David Raccat, chief executive officer and founder, WeMatch Securities Financing
- Ed Jackson, head of corporate actions and income, Seven Investment Management (7IM)
- Peter Sleep, senior portfolio manager, Seven Investment Management (7IM)
- James Palmer, product specialist, DataLend
- Matt Glennon, head of supply, prime finance, Citi
Andrew Neil: A representative from a large pension fund recently said at an industry event that beneficial owners have a ‘duty’ to lend out their assets. Do you agree?
Peter Sleep: No, I don’t agree with that at all. Certainly you can do so to add returns, but after somebody takes 20% or 30% of the fee, you’re getting 80% or 70% of returns and 100% of the risk. That doesn’t strike me as a good deal. If you’re doing that on a special basis and you’re getting a much greater proportion of the fee income, it might be worth your while.
Andrew Neil: What’s prompted you to explore the topic of securities lending lately?
Peter Sleep: I get asked to talk about ETFs and, from my experience, ETF users hate stock lending as it adds a tier of complexity. Whilst perhaps a very sophisticated investor can understand the risks and rewards, the vast majority of smaller clients perhaps don’t and only receive part of the revenue.
Andrew Neil: Can we get an overview of 7IM’s current securities lending programme?
Ed Jackson: We entered into our current lending programme about a year ago. It’s done on a very low risk basis. As of March 2018, we had around £800 million out on loan with very strong collateral parameters. At the last review with our agent lender, the income offset around about 42% of our asset servicing costs. That’s the message we use – securities lending can generate incremental basis points that can offset your custodian and fund administration fees. When done on a low risk basis it’s a good ancillary string of revenue to get.
James Day: It’s a beneficial owner’s obligation to investigate securities lending and make an informed decision about participating in a programme. Lending is one tool in the tool kit and there’s wide industry acceptance of it. As a pension plan participant, I want to understand what the pension trustees are doing around securities lending. Have they looked at it? How have they mitigated some of the risks of getting into a lending programme? If they decided against lending securities, what was their argument to justify that decision?
Matt Chessum: It’s a beneficial owner’s choice whether they want to lend their assets or not. Given the number of different services and transactions that take place in an open-end fund, securities lending is just one of the tools that’s used to generate returns for the underlying investors. It can be complex, it can be very simple as well. If managed in a risk-adjusted way, it can generate some meaningful returns to the unit holders of those funds. So, whilst it’s not a beneficial owners’ duty to lend, it’s definitely their duty to look at it and see whether they can generate meaningful returns within an appropriate risk profile.
Andrew Neil: Do you feel within your own organisation that attitudes towards securities lending have changed on some level?
Matt Chessum: Yes, I do and across the industry for that matter. Attitudes have evolved and the understanding has definitely improved. In part, that’s due to the fact that now we have to post collateral, we have a collateral programme and we will have to potentially source collateral using securities lending. There is therefore a better understanding of some of the benefits that securities lending can bring to an asset manager overall, where before you couldn’t get past the one dimensional view of, “Well it’s just there to fuel shorts in the market.”
Jessica Hynes: We’ve witnessed a lot of engagement from pension plans, but I still see a lot of concern about risk and extreme risk scenarios. For example, I often hear: “If my global custodian goes bust overnight, would my securities lending be safe?” If you’re extrapolating to a risk scenario that is so remote as to be irrelevant, in other words, if the world came to an end and the entire financial system crashed, surely we would have other things to worry about and we would have pulled back our loans before that happened. There also still seems to be a lot of misunderstanding about how securities lending actually works. I was speaking to a very large pension fund that was asking about the ethical nature of securities lending. The Trustee said he didn’t want their borrowers to short their gilts. I had to explain that borrowers of fixed income do not short sell gilts. He was also uncomfortable with borrowers taking their securities and then lending them on to “who knows who”. I had to explain about fungibility, when you give someone £10 and they give you £10 back, it’s not the exact same £10 note, and that you really don’t care what happened to the original note, as long as you get £10 back. From an ethical point of view, surely making returns for the pensioners is the most ethical thing you can do.
Jessica Hynes, Mercer
David Raccat: Securities lending can be as simple as possible but can turn into something extremely complex depending on risk management profiles. You can end up with a basic collateral schedule, or you can end up with 15 pages. We see both. If you just take a simple couple - one lender and a borrower - sometimes you can have tens of profiles. That makes it difficult to digitalise the business. In a market which is extremely bespoke and tailor-made today, WeMatch is pushing for something more standardised. If we manage to standardise a small component of the product, we believe it would represent great progress for the industry. The relationship WeMatch has with beneficial owners and buy-side clients is mainly around transparency, price discovery and best execution. Our approach towards that client segment is more about those concerns and making sure that they are showing their assets to the whole market and can more easily demonstrate that they are in line with what we would call best execution or best practice.
James Palmer: There has definitely been a drive towards increased transparency in this industry, particularly post-2008. We’ve really seen that in the demand for our products. DataLend was launched in 2013 and has grown substantially since. Clients are looking for new ways to use our data, whether that’s to inform their trading activity or to benchmark the performance of their individual funds.
Andrew Neil: Where, specifically, are investors asking for more transparency?
James Palmer: It’s across the board. If you look at the types of firms that are looking to consume data, we’ve seen a lot more engagement from a wider set of beneficial owners in the last couple of years; previously, it was mainly the large brokers and agent lenders that were looking for rates and market trends. This highlights the changing outlook in the industry. We recently ran a survey of beneficial owners where 59% suggested they were looking at securities lending as a vehicle for driving alpha, so they’re looking at securities lending as an investment vehicle rather than purely to cover costs. Like any investment vehicle, clients want data and transparency to identify the potential risks and returns. This is where we have seen significant demand for our new DataLend Portfolio product that was launched last year, specifically targeted for beneficial owners that want insight into and better understanding of their lending activity and potential market opportunities.
Matt Chessum: Market dynamics on their own have helped encourage beneficial owners to start lending, notably the low interest rate environment and the fact that equity markets ever since 2008 have been on a one way rising trajectory. If you look at the proliferation of investment into ETFs and passive investment funds, I don’t think it’s any secret that active managers are under pressure at the moment, with fees being squeezed. Asset managers and beneficial owners are increasingly also on the other side of trade. If you look at a lot of fund management companies, they’ve all got long short funds, they’ve all got absolute return funds, so therefore some of these practices like securities lending have already received board approval because securities lending is part of the tool kit necessary to help the fund to achieve the appropriate returns.
Graeme Perry: Securities lending, like many other financial products, is a risk-reward activity. Prior to 2008, reward was arguably the main focus. Some lenders incurred substantial losses within their lending programmes during the credit crisis, while others were unscathed. This helped the industry to ensure an increased focus on transparency and communication, in order for the sponsor to understand the risks associated with both lending and reinvestment. For agents, it is imperative to understand each client’s risk-reward appetite and to tailor a programme to achieve their desired results. As an example, central banks may be motivated to inject liquidity into the market, while other types of investors, having a longer term, hold-to-maturity type strategy, may be seeking to maximise the yield earned on their assets. At BNP Paribas Securities Services, we are focused on ensuring that our clients receive all of the appropriate information in order to make an informed decision to achieve their goals. We are further committed to ensuring that we provide active engagement on their portfolio’s performance in meeting those targets.
Graeme Perry, BNP Paribas
James Day: Matt (Chessum) hit on a very important point: that organisation’s investment strategies are changing. Beneficial owners are borrowing on their long short funds, regulation is requiring more market participants to collateralise their obligations, and the move to CCPs is adding another option in terms of mobilising assets. Such changes have led to conversations about how to recycle existing assets into an acceptable form of collateral via securities lending
Matt Glennon: Around 2008 we saw a contraction of inventory, but we’ve seen much of that return in the last few years. I’m interested to know from 7IM’s perspective, what prompted the decision to return to securities lending?
Peter Sleep: We changed custodians and it took us a little while to set up our new lending programme with a different agent.
Matt Glennon: So it wasn’t that you were averse to lending?
Peter Sleep: We started discussing securities lending in 2007. Our first lending programme started in 2009. I can remember sitting in one of our conference rooms during the crisis and we always felt we understood what the risks were. In some respects, the crisis helped us understand the risks better. For instance, at that stage it became clear that we didn’t want cash as collateral. I myself am an auditor by profession, so I was familiar with the risk anyway. What took us back in recently? Simply put, we wanted the extra fee income for our clients. We had a long debate internally about whether we should go back in when we changed custodians. I was against the idea.
Peter Sleep, 7IM
Andrew Neil: Aside from your own view, was there much resistance to the idea within 7IM?
Peter Sleep: Yes, it’s fair to say the investment team didn’t initially want to lend. The decision was driven by the senior management of the firm. However, in the end it wasn’t a particularly heavy lift in terms of implementation for the investment team, although that wasn’t the case for our legal and operations teams.
Andrew Neil: What more can be done in the current market environment to promote securities lending programmes with fund managers and board representatives?
Jessica Hynes: My experience has been that the UK pension fund community is quite conservative. Generally, there are a lot of board members who have been around for a long time and it’s easier to say no to securities lending than it is to say yes. When dealing with non-UK pension funds, for example Middle East sovereign wealth funds, it depends on where securities lending is being run from. I was interested to hear what Peter was saying where the investments unit was against securities lending, normally I find investment staff are for it and operations against it. In this case, it sounds like both were against it, but 7IM’s management overruled things. In terms of promoting securities lending programmes, it is critical to clearly communicate on risk management. The Trustees seem to have this creeping dread that it’s all too scary and too difficult, and that my assets might just vanish in a puff of smoke and I’ll lose everything. That’s the kind of perception that you have to work with and explain about collateral and structuring collateral. In general, I’m a big fan of securities lending and I always wave the flag for the beneficial owners to try to get them to understand the risks and rewards, and that risks appropriately managed, which they are, can add revenues that really make a difference. If nothing else, you can justify it by paying your custody fees.
Andrew Neil: How can lenders continue to attract sufficient borrower demand to maintain a securities lending programme at scale?
James Day: Banks generally have three constraints - liquidity, balance sheet and capital. The binding constraint will vary from bank to bank, and vary over time. Crucially, from a beneficial owner perspective, it’s about understanding what the drivers are and the economic benefits that can be gained from their assets if they’re flexible with their collateral. It’s also about understanding how these drivers affect the way banks are looking to provide collateral, and how title transfer versus a pledge structure can have an effect on the value of the lent securities. There are a lot more drivers and levers that are being used within the industry which can have an impact on the revenue that can be generated: it’s not just about the lending of specials.
James Day, BNY Mellon
Matt Glennon: On a day-to-day basis, we’re looking to take or put more structures on with regards to term equity, which will help our liquidity tenor profiles. Back in 2008 most of the book would have probably been managed on an overnight basis. Now we have a liquidity profile, out to one year, that we have to maintain for Treasury, so a part of our desk will be to look at three-month term equity. There’s an increase in demand for GC; there’s a premium fee for that. On the fixed income side, again you’ll see a higher demand from us for HQLA, so that all ties into the regulatory environment that has arrived post-2008.
Graeme Perry: Ensuring that our clients are keenly aware of the drivers of demand is essential. We are committed to unlocking the mystique and enhancing transparency between our counterparts and lenders. The data providers have done an excellent job of providing detailed information that we utilise to provide our clients with appropriate commentary on their portfolio performance & associated risks. We find that our clients are committed to understanding drivers and have been actively engaged in that respect. Through a transparent dialogue, we undertake as our responsibility, to provide any revenue enhancement opportunities to our lenders, and help them optimise their returns within their risk parameters.
Matt Glennon: From Citi’s standpoint as a borrower, if beneficial owners understand the market better with regards to where they fit - GC or specials - then they will line their profiles up more effectively to meet demand. They’ll be the inventory we prefer. Brokers all have different demands and capital structures for different reasons. The more flexible a beneficial owner is, it’s ideal for us because our demands may change week to week, whether its balance sheet constraints or capital or liquidity s. These can change quite quickly in the current environment, so having a supply source with very flexible parameters is very beneficial for us.
Andrew Neil: What is some of the data showing from a revenue perspective, James?
James Palmer: The story of 2017 can be told in two halves. The first two quarters of 2017 were characterised by cooling in the specials market. We then saw significant bounce back in the second half of the year as general collateral (GC) volumes increased. The total on-loan balance across asset classes at the start of 2017 was about US$1.9 trillion globally; come the end of 2017 that had increased to US$2.3 trillion. As of March 2018, the on-loan balance for securities globally has continued to grow to US$2.6 trillion. There’s a continued trend of increasing balances, which is primarily being driven by fixed income assets and GC equities. As a proportion of revenue in 2016, the specials market (securities trading above 250 basis points) accounted for 52% of total revenue that year. In 2017, that decreased by 6%. The balance has been picked up by revenue from GC trading as volumes in that area of the market have grown. The net result is a slight year-on-year uptick in revenue for 2017 to US$9.2 billion globally.
James Palmer, DataLend
Ed Jackson: From our point of view, the DataLend statistics match up with what we’ve experienced. 7IM has multi-asset portfolios, so we have got a lot of HQLA in our portfolios. Portions of that have gone out on loan. We’ve got around £500 million of HQLA out on loan at the moment,
Graeme Perry: As noted earlier, we feel that it is our role as agent, to educate our lenders about the risks inherent and present within the business, as well as equipping them with the tools available to manage those risks. Revenue enhancement opportunities are best derived through managing within the context of each individual client’s risk criteria. Demand drivers have changed over the past decade. Regulation has been one of the key contributors to this change, due to the changes within Basel III, for example. We are seeing enhanced opportunities within the HQLA lending space as a result, and several of our clients have been able to enjoy substantial returns in that respect. With the significant bull market trend that we have seen over the past few years, equity lending revenues have been reduced from historical levels, as fewer high value securities have existed. Despite this, client portfolios have seen significant returns in part due to the increased fail coverage demand as a result of the settlement timeline changes to T+2 from T+3 which are still ongoing in some markets. Increased corporate activity has also led to significant opportunities to capture incremental returns within the equity space. Furthermore, many beneficial owners continue to have a misunderstanding around general collateral. There is continuous demand for general collateral with the right structure and decreased levels of risk, particularly in a noncash transaction. The stable revenue stream general collateral lending provides is something not to be ignored.
Andrew Neil: How are beneficial owners approaching SFTR?
James Day: SFTR is a dual-sided reporting regime for counterparties in the European Union (EU). When you’re conducting an SFT with someone outside the EU, then it’s a one-sided reporting obligation. In both scenarios, you are required to report to a trade repository (TR) and there’s a huge amount of data that needs to be reported. In a principal to principal capacity, most agent lenders operate in a pooled model and then divulge under ALD who the underlying principals are to that transaction. All of that data needs to be reported. Fields need to be matched within the TR so there are a number of firms in the industry that are offering an SFT solution. What we’re looking to do is use one of those solutions and do the trade reconciliation on a real-time basis, so when the data goes to the TR it should have been reconciled beforehand and should flow straight through. Beneficial owners have the obligation to report under SFTR and while there is the ability to delegate or have assisted reporting, the regulatory obligation is still on the beneficial owner to make sure that data is accurate.
David Raccat: The FSB in their initial shadow banking report nearly a decade ago put in black and white that their bottom line objective was to have the securities finance business cleared. They haven’t come up with a strong requirement to clear SFTs. They came back with SFTR which, let’s face it, is a nightmare.
Jessica Hynes: It’s no secret that the regulators are no fan of high finance in general and securities lending in particular, they’ve been trying to choke it off. SFTR is one great way of doing it - make it too difficult, make it too expensive, raise the costs.
Ed Jackson: We’re going to be expecting that our lending agent does most of the heavy lifting on this – there’s no other option for us really in terms of the costs involved. If we had to do the reporting ourselves, we would probably just pull out the lending programme entirely. It’s interesting, obviously we’ve had conversations and dialogue with our lending agent, but as yet we haven’t seen anything as to what the solution is going to look like. It’s 12 months away, the onus is on us to ensure that reporting has been delivered to the trade repository, so we need to make sure that whatever the solution looks like is good enough to fulfil our responsibilities. It will be nice to see what’s being worked on and what it looks like, but as yet we haven’t been shown any demonstration as to what that solution is.
Ed Jackson, 7IM
Matt Chessum: SFTR is already alive and kicking for beneficial owners, in annual reports we already list a lot of information that is arguably useful to the underlying investors. That’s a service that we’re already providing in the annual reports. It’s interesting for beneficial owners from a couple of perspectives. Firstly, SFTR reporting, given the costs involved, might take some of the noise out of market so some of the lower revenue generating transactions will no longer take place. That’s a positive thing for underlying investors. Secondly, if we ever get to see the information in a form that is representative of the overall market, that’s good as well because it will show us very clearly the other side of the market that we don’t get to see very often. We’re looking to work with our agent lenders, but we might have some obligations internally as well on other areas of the business where we’re going to have to do reporting ourselves. So, whilst I say that from a securities lending perspective we’re probably going to be looking towards our agent lenders to be helping us out, if we’ve got collateral trades happening or if we’ve got certain repo functionalities in certain products, then we’re going to have to do that reporting ourselves anyway. That might be an obligation, given that we’re responsible for that information and for the processing of that information, that we might choose to take on ourselves.
Matt Glennon: SFTR will bring challenges but it does push us down a much more efficient route. T1 reporting deadlines effectively should get market participants into a place where there is much more accuracy from a settlement perspective. Another regulation, CSDR due in 2020/21, may introduce automatic fines and buy-ins on SFT transactions. With SFTR coming in ahead of that, in theory CSDR should have a minimal impact on the securities lending industry because hopefully the market will be much more efficient from a trading and settlement perspective by then.
Graeme Perry: We as an industry have always encouraged transparency and SFTR certainly formalises this. There have been significant delays in its implementation, and this is a testament to the significant impact and effort required to implement such a macro reporting change. Once done though, we are confident that it will yield the desired results of improving transparency within our traditionally opaque OTC market. Regulators have taken an active interest in ensuring that the improvement to transparency occurs and SFTR is one example which shows their commitment and engagement in making that happen. The data is going to help the regulators and industry at the very least to understand the material nature of SFTs and how important our business is for the optimal functioning of capital markets globally. Greater transparency through increased levels of reporting to regulatory entities certainly has a cost and thus far the industry has elected to absorb these costs. As both SFTR and SEC Modernization mature, the market will need to evaluate how to share these costs with beneficial owners.
James Day: SFTR reporting also aims to bring clarity to the regulators as to where liquidity is being provided into the marketplace. As a global bank operating an agent lending programme, liquidity from our US clients gets distributed within Europe. This means we need to solve SFTR across our global book. ESMA is an early adopter of the Financial Stability Board recommendations for transparency in the securities financing market, so we will have to wait to see what the other regulators do around transparency in their jurisdictions.
Andrew Neil: Do you expect some of the smaller lenders to step out because of SFTR reporting?
James Day: Right now I don’t think the industry fully knows what the costs could be on a granular level. There are some unit costs being bandied around but it comes down to the reward you’re getting out of your programme and you have to weigh that reward against the project overhead cost of becoming SFTR compliant, and the ongoing cost of reporting. I don’t think it’s fair or right for us to say whether some smaller lenders are stepping away, but if the costs are too high it’s going to put a strain on some, that is for sure.
Graeme Perry: We would recommend beneficial owners to look at their lending programmes, and question if the cost of operating a lending programme justifies the reward that they gain from lending. Asset owners will have to take a serious look at their business models and question whether it makes sense.
James Palmer: EquiLend is focussed on working with the industry to provide a solution for SFTR. One thing a lot of our clients learnt from complying with previous reporting and regulatory regimes, including MiFID II, is that it’s never too soon to start looking at how new rules are going to impact your business. A lot of lenders and borrowers are participating in our SFTR working groups. We’re working with them to shape and build an efficient solution for the market.
David Raccat: There was an interesting discussion recently about whether SFTR 2.0 is going to happen with ESMA asking for similar reporting on SFTs but with only a 30 plus data fields. Whatever the case, it’s interesting to think about the exact message the regulators are sending to this industry currently when they say, “Send a report with 160 plus fields.” This is a burden and there are question marks on what exactly regulators will do with the data. They are going to receive trillions of data points and will need very smart people to be able to analyse the information and do something with it. It’s a huge work for the industry, it’s a huge investment. There are some solutions which are being facilitated, but they will not answer the needs of everyone. Everything which is non-EU is going to be a bit difficult to report as there is no harmonised reporting across the globe. It’s going to be a challenge.
David Raccat, WeMatch
Andrew Neil: Ultimately, is this a market that truly embraces technology or puts the brakes on innovation?
David Raccat: There is a lot which is working pretty well. However, in my view, some systems are old and the industry is moving slowly. Maybe there is not enough budget allocated to platforms or technology, but these, ultimately, are excuses. We’re still in the very bespoke and one-to-one relationship industry, and trends suggest that will change at some point. We’re trying to position ourselves for more transparency, best execution and better price discovery. These trends match up with what the regulators are looking for. Regulation is a catalyst for more automation and will push firms to change the way they work today. In addition to just welcoming initiatives like platforms or trading venues, it’s also about change management and about accompanying clients to make sure that they don’t feel like they do this because they have to, but because it’s going to bring them something valuable. That’s the whole name of the game for us. It’s not an easy one, but this is what we are trying to do - bring benefits, create value and make sure that our users are happy with the fact that they are going into something different but something which is bringing them value.
Matt Glennon: In a world where resources are being scaled back, the emergence of platforms and new technology in the securities lending market is a good thing. Where firms leverage such things quickly is where a lot of the activity is occurring. We need to change and act today. Technology and new platforms give us opportunities to do that.
Matt Glennon, Citi
Graeme Perry: As an industry we have been reasonably slow in embracing technology. Banking institutions are keen to highlight their investment across technology and innovation with Blockchain being a key focus. Securities finance is of course included in technology spend, but we must do more as an industry to get key concepts right and, ultimately, take to market quicker. That said the industry is engaged in dedicating resources to operate more efficiently. This engagement has led to substantial initiatives across the entire transaction from pre-trade to execution through post-trade reporting. Substantial amounts of resources at both the agent level and even beneficial owner level continue to be allocated to refine the lending process. Machine learning, artificial intelligence, and Blockchain are several examples. It is imperative your agent is involved in this process and there is a direct correlation between technological developments and increased efficiency and thus higher revenues.
James Palmer: We are seeing clients continuing to invest heavily in technology, in particular by adding more automation to their processes for both trading and post-trade activities. We are also seeing clients incorporating deeper insight into trends, opportunities and efficiencies through traditional market data but also bespoke analyses and trading analytics. The securities finance market is one that embraces technology, and we see first-hand how market participants are relying more on technology as volumes across our platforms continue to break records.
Matt Chessum: I want to see agent lenders act as price setters rather than price takers. I want to see them take the information that’s available and come up with their own pricing mechanisms and go out to the street and say, “This is what we think it’s worth,” rather than sitting back and saying, “That’s what my broker’s telling me that he’s prepared to pay you for it, so I’ll just try and bump him up by 5 or 10 basis points.” Information is important. If you look at any other execution activity within the market, then there’s transaction cost analysis (TCA) that takes place – why did you trade with that broker and why did you execute at that price, at that point in time, what strategy did you use? There’s none of that available with securities lending.
James Day: We should not lose sight of the fact that this is a complex marketplace with differing collateral schedules, credit appetites and varied netting opinions, all of which create different benefits for borrowers and drive different pricing points for beneficial owners. This means that you’re not always comparing apples to apples. It can be difficult to implement a proper TCA solution that takes into consideration all the variables when comparing the performance of borrowers and beneficial owners and that can help explain why we executed a trade at one price as opposed to another, or why we executed with a specific borrower at this specific price? Finding a TCA solution that takes all those client specificities into consideration can be tough.
Andrew Neil: How can UK beneficial owners position for success in 2018?
Matt Chessum: Securities lending revenue should be looked at like any other investment activity. It shouldn’t just be looked at on a one-year basis, they should be looked at continually just like any other investment that you would make within an asset management type function. You might have a bad year one year, or revenues might be down, but over a 5 year stretch, if you’re just not making the money then perhaps you really do need to decide that it’s not for you and your portfolios aren’t conducive to generating decent returns from a securities lending perspective. Given where we are at the moment, I would say beneficial owners should remain patient and don’t get carried away by all these agent lenders telling you that you should lend against any form of collateral that’s indemnified because you haven’t got any risk, etc.
Matt Chessum, Aberdeen Standard Investments
Jessica Hynes: I’ve been seeing a little bit of disappointment in the marketplace actually, because the big returns that used to be enjoyed are no longer there, so it gets to the point now where clients have to be convinced that the modest returns are worth the hassle and the perceived risk. I don’t see a huge up-swell of interest in the sector. I will just continue to try to educate and manage expectations and communicate what is still a good trade.
Matt Chessum: Be patient, there’s more volatility coming into the market, interest rates are rising, there are going to be more opportunities. There are things happening in the US in terms of taxation, etc., more companies might have some money available so there might be more corporate activity taking place, so I believe that this year will be good from a securities lending perspective. I don’t think we’re going to change anything that we do, we’re going to sit tight and we’re going to wait for the opportunities and, where they make sense we’re going to continue earning those extra basis points for our investors.
Graeme Perry: There are two elements to new lenders, which are new supply and un-lent supply. Is there un-lent supply out there? Of course there is. Do we think that that will come to the market? Once again, when you look at the interest rate environment and the equity markets, we’re still some way away from having a normal world. Going forward we would hope that an increase in volatility and/or corporate activity will contribute to creating securities lending opportunities in the equity space thus creating higher associated revenues for this asset class. We do hope that new supply will continue to come to the securities lending market. We’ve also seen more beneficial owners questioning their current arrangements. “Are we getting the best deal? Are we performing in the right way? Are we being told the right thing?” These conversations will be ongoing. That said the financial markets may still have to normalise for new supply to come in en masse. As an agent it is our responsibility to present new strategies and ideas to beneficial owners. This includes unique structures (borrow vs pledge), new counterparties and bespoke solutions (collateral transformation) to increase revenue. Specifically, asset owners are seeking idea generation from their agents with greater interaction and involvement in the educational process. A prime example is equities as collateral and the perceived notion of higher risk associated with accepting this collateral type. We cannot lose sight of the ongoing critical role that transparency plays within a lending programme. These elements will remain centre stage front of the relationship that agent lenders must build and provide to clients.