Simon Heath, managing director – EMEA head of agency securities lending at J.P. Morgan, looks at recent developments in the MENA securities finance market and explains how agency lending is being adapted to meet clients’ wider liquidity needs.
MENA is a strategically important region for the securities finance market and for J.P. Morgan in particular, with a large number of marquee clients who are active in the lending market and with increased activity in the region across a number of areas.
Within existing lending programmes, we have noticed a broadening of mandates through an increase in lendable assets, changes in collateral profiles as well as greater cash reinvestment opportunities. We have also experienced a more active dialogue – in terms of both the traditional agency lending model and broader agency financing capabilities – and an encouraging
level of new enquiries from clients seeking not just securities lending but wider opportunities in financing and collateral.
Then there is the exciting prospect of new markets opening up. Developments in Saudi Arabia have been well documented and this will be a key market in the coming years, although it is not the only part of the region where securities finance has scope for expansion. If we look at Saudi Arabia specifically, the emergence of new lending markets is always a positive development for any region because it introduces greater liquidity, boosts the secondary market, and is helpful in terms of giving clients wider access to financing.
There are always a number of challenges to opening up a new market, but the work that has been done with the Saudi Stock Exchange and the initiatives undertaken by ISLA have been very helpful in this regard. The challenges faced by MENA beneficial owners are similar to those faced by many clients in the current lending environment in that there is a degree of oversupply in the market vs demand. Given this, the responsibility of agent lenders is to come up with products to ensure local clients’ assets remain active in programmes.
We have seen an increase in enquiries for the Saudi and Kuwaiti markets in terms of funding as well as borrowing, and this will lead to wider ownership of client assets and increased liquidity and financing opportunities within the secondary markets.
One of the questions that regularly arises during any discussion of the MENA securities finance market is whether we are seeing any changes in lenders’ approaches to collateral. Over the last two years, there has been an expansion of the acceptable collateral in our lending programmes on an aggregate basis across a range of asset types, for example, Korean government debt. ETFs and broader equity schedules are also much more commonly accepted and I see no signs of this trend slowing down – in fact, collateral flexibility is increasingly a key differentiator for clients.
A key driver of this trend has been the large number of clients within the region who are at the forefront of expanding their collateral parameters, and this is a healthy sign for the market. Decisions around collateral are often pitched as a choice between cash and non-cash, but we have a rather more nuanced perspective in that we don’t see them as binary options. A client can have a cash programme that is completely in line with their non-cash parameters. The risk profiles we are seeing between cash reinvestment programmes and non-cash are becoming increasingly harmonised. It then becomes a case of how we ensure that a client’s programme has risk-adjusted returns and appropriate investment opportunities whilst ensuring we are trading on the client’s assets in the most efficient and optimal way. Indemnification remains a key offering and, given we set aside capital for any collateral we take, the risk adjusted element is crucial for both client and agent.
In terms of how agents such as J.P. Morgan can support institutional investors in the region, agency lending is only one part of the broader agency financing capability. The pipes that facilitate the stock loan or agency financing can lend themselves to multiple uses and, when you take this view, you become part of a client’s holistic collateral and investment strategy as well as their operational capability. This is a subtle but vital differentiator where agency lending can be adapted for a client’s wider liquidity needs.
For clients, this is a much more strategic approach than saying ‘I can make you x basis points on this portfolio’. Should a client wish to raise short-term liquidity, for example, the agency lending pipes can be used to structure these trades rather than selling assets or drawing down on other forms of liquidity. Such flexibility has obvious benefits across a client’s business.