Just 6.8% of the available global securities are on loan,
fairly evenly spread across lendable securities around Asia,
America and Europe, according to Markit Securities Finance
But Canada is a particularly interesting market, with
utilisation high at around 10%, because many of its companies
are resource and big oil companies that pay scrip
"Scrip trading is quite a profitable trade in securities
lending, because it lets you play the optionality of the
dividend payment and is a good source of market neutral
revenue for beneficial owners such as pension funds," says
Markit Securities Finance analyst Simon Colvin.
"In Canada, balances are all over the place as these
companies pay their dividends. The larger the dividend, the
more optionality there is."
Several Canadian firms are looking to expand their presence
in North America. For example, BMO Capital Markets has
leveraged the securities lending team and assets of Paloma
Securities, which it acquired in 2009 to build up its equity
Tony Venditti, managing director and global head of BMO
Capital Markets’ Global Prime Finance Group,
based in New York, says: "We have been focusing on IT and
infrastructure in order to strengthen and grow our global
BMO has offices in the UK, Ireland, Australia, Canada and the
US, and he says BMO is "integrating and aligning systems to
realise even greater efficiencies".
Securities lending is mature in the US, so it has been easier
for BMO to connect to multiple counterparties and pockets of
supply and demand.
"As European markets and banks come out of a very challenging
credit environment, I believe there will be many
opportunities that could drive growth. This seems to have
started especially after the past 18 months of positive
returns in most core European markets. I personally think
that Europe will be more of a growth opportunity in the next
few years, as Asia has become over time."
BMO currently has a more established presence in capital
markets and more distribution points, so "there is a clear
opportunity to win more North American business from European
clients and it is also easier to expand closer to our North
American time zone".
One driver to expansion is that clients are more demanding
and expect global reach. "There is a lot more transparency in
the securities lending business with much more activity
around the renegotiating of daily rates on multiple
securities," Venditti says.
"The underlying clients seem to have a better idea of the
risks they are taking and how much they are getting paid for
those risks. Additionally, the increased regulatory scrutiny
ensures everyone is paying attention to how their portfolios
are being lent, as well as to the spreads that are
Large lenders typically set a high profit split in favour of
their clients in order to encourage lending activities, but
now the underlying client demands more, especially around
what happens to either the reinvested cash or the collateral
and the spread earned on both. In the past, lenders would
concentrate more on lending as many assets as possible.