Keith Haberlin, with over 20 years of experience in capital
markets, has worked with beneficial owners in all market
conditions. He joined Brown Brothers Harriman in 2004 and has
spent the past five years in leadership positions, most
recently the global co-head of securities lending at the
Boston- based firm. Haberlin will be speaking to delegates at
the IMN Beneficial Owners' International Securities Lending
Conference, January 27-29, in Austin, Texas.
Haberlin says there are two critical issues dominating
beneficial owners' thoughts, which will be at the centre of
proceedings - revenues and indemnification.
First, on the revenue side of the equation,
beneficial owners are asking: Is the current, subdued revenue
environment the new normal or is it a function of
Haberlin says it is not the new normal, just currently
suppressed. "There are some structural as well as cyclical
reasons, the latter due to current monetary policy."
A low interest rate environment removes the ability to generate
reinvestment income. "The consequent equity rally, caused by
quantitative easing, is keeping short sellers on the sidelines
for the time being and to some extent is hampering merger and
acquisition activity as corporates are concerned about
overpaying for companies."
These factors are causing cyclical headwinds for revenues, but
Haberlin expects revenues to pick up once monetary policy
"What we are saying to beneficial owners is hold serve for the
time being and ride this cyclical trough out," says Haberlin.
"You will want to be in a lending programme when demand starts
The second key issue is whether indemnification will
continue to be a standard offering. Historically,
indemnification - an agreement to compensate the beneficial
owner in the event of a loss - was effectively provided free by
agent and custodial lenders because there was no charge to the
bank's balance sheet.
"I believe that the rubber is going to hit the road at this
conference," says Haberlin. "The discussion has been going for
a couple of years, since the regulations were first proposed,
and people have begun to realise that it is going to cost
something when it is brought on to the balance sheet of
At the conference there will be a discussion about the future
of indemnification - whether it is going to be scaled back,
offered selectively, charged for or withdrawn completely. Both
Basel III and Dodd-Frank will influence the fate of
"If you think about it, the idea of providing a guarantee
against losses, and providing that guarantee for free, does not
really exist elsewhere in portfolio management, so it is not
the worst thing if the regulations have prompted a
re-evaluation of the whole concept".
If indemnification is withdrawn, some risk will be pushed back
on beneficial owners, so they will need to pay more attention
to the parameters of their programme and the track record of
their agent in managing risk. "This is going to be a good
conference for beneficial owners, putting the issue into
The conference will be bustling with agent lenders with varying
approaches to the business, which they will put forward to
beneficial owners at the many public panels (see box,
overleaf). The closed-door sessions will give beneficial owners
the opportunity to compare notes in private. "It will be a key
conference for beneficial owners to determine their strategic
participation in securities lending."
It is perhaps too early to say whether beneficial owners will
be happy to go without indemnification. It will, at least to
some degree, depend on their level of sophistication.
Anecdotally, some already consider indemnification to be of
marginal benefit - as banks offering it may not be in a
position to honour it should there be another crisis - whereas
others see it as a necessity for continuing their
"Sophisticated investors understand that it is a transaction
that is fully collateralised, at a margin, and one where they
control who they can lend to and what collateral they are
prepared to take. Compared with other trades, it offers a
really good risk-adjusted rate of return."
None the less, more attention will be paid to the risk
parameters of their programme, as well as the financial
position of the agent or custodial lender they are
"If you put those two things together - subdued revenues and
removal of indemnification - then the essential question for
some beneficial owners becomes: Is it worth it?"
In an era of subdued returns, beneficial owners are
looking for ways within their control to increase their
revenues, such as entering new markets and changing their
collateral profiles. "The conference is going to be good for
addressing that question as well."
In a low interest rate environment, beneficial owners are left
wondering which levers can be pulled to generate more returns,
including seeking out international opportunities. "They are
very interested. As revenues in developed markets have become
depressed - also due to tax harmonisation or a lack of market
demand - they are looking to emerging markets to replace those
revenues. They are very engaged."
Markets such as Brazil and Taiwan, or further out on the
horizon India and China, are under consideration and will be
addressed at the conference. "Not only the returns," says
Haberlin, "but also the risk considerations, as they are not
One of the other themes still circulating, at least among
sell-side participants, is the potential for a shortfall of
collateral . OTC derivative regulation and Basel III may
increase demand for fixed income assets, potentially creating a
shortfall that securities lending can fill with assets produced
through collateral transformation, the practice of transforming
assets that are not eligible at the central counterparty (CCP)
to ones that are eligible.
"What is interesting is that, globally, some of the regulations
are working against each other. Dodd-Frank and Emir [European
Market Infrastructure Regulation] are forcing asset managers to
put up high-quality collateral at the CCP while shadow banking
and Esma [European Securities and Markets Authority] rules are
going to make it very difficult to reuse collateral in
transformation. It is a topic that is likely to be
Doubtless it will be so at the IMN conference. "While we are
currently in a cyclical low point for demand, the long-term
fundamentals for demand are strong. The principal reason for
that is the growth of hedge funds.
They are the primary source of demand to borrow securities and
we are seeing hedge fund assets really benefiting from a shift
- you now have institutional investors and retail investors
looking towards hedge funds as a way of getting less-volatile
returns. They are really entering the mainstream and their
assets are growing as a result."
Haberlin estimates hedge fund assets under management total
$2.4trn, above the $1.8trn peak before the crisis, and are set
to grow further.
"That should mean more hedging, more shorting and good news for
securities lending demand."
We are now at the point of the cycle where hedge funds are
putting their considerable assets to work in strategies that
are not driving the demand to borrow, broadly speaking going
long and riding the rally, but this may soon change as equity
markets are hitting new highs.
"Even if indemnification is removed, and even in the current
rate environment, we are still talking about collateralised
transactions, with a margin, which delivers additional returns
for fund managers on assets that would otherwise be sitting
idle and incurring custody fees."