Don D’Eramo, global head of securities lending, RBC Investor and Treasury Services, tells Global Investor how the firm’s investment in technology enhancements and automation is paying dividends
How has the recent market volatility affected what your clients expect of you?
When you have a clear picture concerning the goal of your client’s programme, periods of high volatility shouldn’t make a big difference. However, discussions with both portfolio managers and clients around directional trades and shorts have increased in frequency and depth. During those conversations, the question of restricting positions for example, or otherwise responding to a particular trading environment has arisen. Readily available market information on warms and specials has aided the dialogue with beneficial owners, as well as going a long way with portfolio managers in particular. Conversations are an ongoing part of our daily contact with our clients: fluctuations in market volatility, or the changes occasioned by specific financial events should not generally signal a shift in the wider objectives of a securities lending programme. In terms of the impact of structural shifts, it is worth looking forward to the question of the direction of interest rates. Currently a number of securities lending operations are strictly non-cash, meaning that interest rate fluctuations and the implications for re-investment do not exist. However we are starting to see an increase in interest for USD cash reinvestment from a subset of clients with the right lendable assets which we are exploring.
Why have you placed so much emphasis on your technology platform in recent years and what impact is this having?
Today, roughly 75% of our connectivity with our counterparts – be that around targeted availability or client orders of interest – is automated. Increasing the proportion of our book that is automated has had a marked increase on rates of flow. More pertinently, we provide daily pricing, on either side of the trade which expedites the decision process on whether or not to execute which is highly valued by our clients as it’s not an industry norm. It is also important to our lenders too. Today, beneficial owners are looking increasingly to agent lenders to act as price-makers rather than price-takers. They expect us to shape the information that is available with their internal pricing mechanisms so that they can go out to the market with a price, rather than reactively bid up the price that a broker has offered. This sort of price generation is only accurate if you have the information at your fingertips and you have the means to make sense of it. We are now delivering better transparency and more granular metrics with our lending clients achieved through automated technology. The knock-on effect is a deeper conversation about their wider financing business – be that fixed income versus equity or high quality liquid assets (HQLA). In general, our conversations are more valuable as the opportunities are no longer limited to shorts. Our transactional approach allows them to see a wider range of opportunities inherent in the custody assets that are not currently in use. The increased data has also led to greater engagement with non-lending custody clients including those who originally felt opportunities were too limited for them to justify a program.
What does automation mean in terms of what you can provide lending clients?
Automation means a timelier delivery of and more meaningful information about what clients have available. Having this depth of information inevitably means we can achieve a tighter focus on structuring opportunities on either side of the trade. Advancements in our technology led to an increase in proactivity as the trading desk has an improved grasp of our lender’s available assets which in turn has created faster turnarounds leading to increasing opportunities for borrowers, and ultimately more business. The result of this stress on automation is that we are seeing a growth in our market share, in part facilitated by our flexibility to offer the facility to transact on both an agent and a principal basis. It is clear from the results of client surveys, such as those produced by GI/ ISF, that this type of access is increasingly valuable to clients. This trend is evident across the opportunity set – be that term trades, evergreens, HQLA Level 1 vs equities (it was particularly evident in specials trades) – and across regions – be that North America, Europe or Asia Pacific. We have found that we can turn around opportunities quicker by combining that deeper information set and the access to the desk. This is important at a time when clients are looking to widen their opportunity sets.
Can you give an example of how automation generates opportunities that might previously have been missed?
Speed of response is the obvious example. This drive to greater automation has meant that today we are typically able to turn around any opportunity – from term to evergreen, from 2-1-2 to bullet-term trade – within days. We’re getting that speed of response in part from the groundwork because we understand the universe of the client’s lendable inventory. We know immediately if the profile of that inventory is conducive to the incoming opportunity. A bi-product is in the warm space, where there are additional benefits in terms of the ability to develop new approaches or ideas to access supply. The benefits of responsiveness extend to borrowers too. Then there is the experience we bring to bear from elsewhere in RBC. Here, we have developed short-form agreements, which allow us to mine the non-lending custody assets within the bank. By tapping into the ‘data lake’ that has been created through our on-going technology initiatives, we have been able to scour the global custody platforms almost instantaneously to identify high value opportunities. This means that when an opportunity arises from a special situation or corporate event, we can speak to clients and potentially release ‘unlendable’ inventory into the market relatively quickly. For a non-lending client we recently turned around one such opportunity in a week – from identifying the opportunity, the client, structuring the loan and placing it. Again, the foundation for all this is the automation we have achieved with our day-to-day flows. Meanwhile, we continue to work on contact with our lenders to educate them as much as possible about what opportunities are out there.
How has the increased focus on risk management affected the balance of services that clients are seeking?
The greater focus on risk management means that, among our broad-based suite of collateral services, equity as collateral is the fastest growing asset class. However, mutual funds in Canada continue to be restricted from taking equity as collateral. The industry continues to engage with regulators on this matter. With our ability to indemnify not only a broad base of collateral but also a wide range of global financial institutions, it positions our lenders to strike the balance of gaining alpha on their portfolios while cognisant and reassured of the risk management factors and mitigation actions at play.
Which areas do you expect to see greater client demand in future?
The liquid alternative space is continuing to gain momentum in North America so we are looking at the potential of developing our services to meet this anticipated demand and are already exploring the potential for mutual funds in Canada