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Canadian securities lending is thriving

06 May 2014

The Canadian securities lending market is enjoying high rates of utilisation and its domestic banks are expanding into new markets. Ceri Jones investigates

Read more: Canada Markit Securities Finance BMO Capital Finance BNY Mellon Clearstream Citi

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 calculations.

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 dividends. 

"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 finance capabilities. 

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 platform." 

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". 

Global demands 

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 earned." 

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. 

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