Global Investor spoke to representatives from NZ Super Fund on the investment group’s re-entry into the securities lending market. The £20 billion sovereign wealth giant stopped lending shortly after the financial crisis - but picked State Street as its lending agent two years ago.
After a lengthy hiatus, NZ Superannuation Fund started lending securities again in 2017. What were the primary reasons behind this decision?
We saw an opportunity to use securities lending to better utilise the Fund’s assets, and enhance the yield they generate. Importantly, we had also increased staffing in our Portfolio Completion team – we had the capacity. As part of our decision, we also factored in a number of changes to the market over that eight year period. These included a move away from exclusive portfolio lending to overnight and term lending and a greater emphasis on risk management by agents and better transparency. Other factors included a trend for borrowers to provide non-cash collateral (bonds etc.) rather than cash; lending being seen by asset owners and managers as an investment and not a back office activity and also collateral from lending programmes being managed in segregated accounts with the lender determining the security type and credit ratings that it can be invested in. Since resuming lending, both return and utilisation rate have been slightly above the industry average (market benchmark).
What were the reasons for appointing an agent? Couldn’t securities lending have been done in house?
For us (and remember we’re based solely in Auckland), it is more efficient to use an agent lender to manage a day-to-day securities lending programme due to the high operational cost and complexity. Managing corporate actions, substitutions and securities recalls requires operating capacity across different time zones, which we don’t have. An in-house programme could potentially focus more on trades with higher borrower value or long duration, and is something that we will consider in the future.
How restrictive are you when it comes to approved borrowers and collateral reinvestment?
Borrowers must be approved in writing and recorded in the Securities Lending Authorization Agreement (SLAA) with the lending agent. There’s also a concentration limit per borrower. Cash collateral that we receive is managed by the agent lender under a segregated cash reinvestment mandate. The mandate is designed to be low risk and will only hold cash, short dated certificates of deposits with highly rated banks (A-1/P-1 short term ratings minimum) and the agent will also invest cash received in reverse repo transactions. These reverse repo transactions also have an indemnity protecting the Fund from losses.
New Zealand equities were not initially on loan. Why not and has this changed?
There isn’t a deep securities lending market in New Zealand (there’s low interest from borrowers), the New Zealand share market itself is a small one and all of our New Zealand equity investments are managed actively – this makes the New Zealand market unique in the Fund’s portfolio. Given this context, we decided against it, and can’t see this changing.
In addition to lending, the fund also began research on vendor solutions for optimisation and implementation of asset delivery to minimize financing costs in meeting collateral obligations. How was this progressed and why is this area important?
Collateral and balance sheet optimisation is the ultimate goal for us, and we have initiated various projects to support this goal. Currently we are looking to build the infrastructure for internally borrowing securities from our passive portfolios for the purpose of direct securities lending and financing. We are also investigating options on posting non-cash collateral for margins for over-the-counter derivatives, in order to reduce the performance impact drag on the Fund from posting cash for margins.