Free Trial Corporate Access


Global Investor Magazine Copying and distributing are prohibited without permission of the publisher
Email a friend
  • Please enter a maximum of 5 recipients. Use ; to separate more than one email address.


Beneficial owners share their concerns

15 August 2014


Paulina Pielichata discusses counterparty risk, collateral management and fixed-income lending with three beneficial owner pension schemes

Read more: counterparty risk collateral management fixed-income lending




Sam Sicilia, cheif investment officer of HostPlus, the superannuation fund for the Australian hospitality, tourism, recreation and sports industries

We do not have a very big lending programme at present. I can say that we have seen an increased demand for securities but the total volume that we have available in dollars is not great. Predominantly, we lend domestic shares via our securities lending programme run by our custodian Citi.

In 2013, we switched [custodian] from JPMorgan to Citi and as a result Citi also administers our securities lending programme. Our domestic securities lending programme had run very nicely under JPMorgan and we have had no issues since we initiated the programme with Citi as well. We continue to be interested in monitoring counterparty risk.

Our custodian indemnifies us from any counterparty risk and compensate us for any irregularities that may occur as a result of securities lending. We could have gone to an independent agent but we felt that that would add an additional service provider to monitor. Furthermore, we know very little about third-party securities lending specialists in Australia.

It interests me – why are there not many specialist providers offering securities lending? In securities lending it is not always obvious which type of borrower you are dealing with. There is a group of borrowers that would borrow securities for activist reasons, in order to secure securities for the purpose of voting at an AGM, rather than for legitimate use of the borrowed stock such as short selling.

We are giving some serious thought at the moment to how we can mitigate this risk. We can recall every security that we have on loan just before the AGM of the organisation to which the security on loan is connected. But that could possibly be detrimental to the securities lending programme and it would have an impact on Citi as a lender. It is high on our agenda – to monitor so that borrowing does not happen for voting purposes and maintains the integrity of the programme.

My understanding is that if anything would encourage more funds into the market, it would be fixed income lending for fixed income shorting. There should be more activity in this space. We, however, do not have a deep bond portfolio.



Stephen Anderson, assistant vice president of equity derivatives and relative value Healthcare of Ontario Pension Plan

What we have been seeing in this environment is that market participants are looking more closely at the value of different types of collateral.

We started looking much more closely at collateral management approximately six years ago and it has become an important part of our frontoffice business. For the purpose of collateral upgrade trades, we have developed an in-house system that tracks where the collateral is used and monitors all of our collateral positions closely as well as projecting future collateral movement.

Collateral management is largely ignored by a lot of beneficial owners. They are ignoring the fact that it can be a revenue generating business. I expect that the value of collateral management business will increase. In the next few years we will see more beneficial owners take it in-house to track and move around their collateral.

People will definitely pay more attention to it and, rather than letting their custodian manage it on their behalf, they will do it themselves in-house. I think financing through the repo market will be another trend in the coming years. We access the repo market on a daily basis for cash management purposes.

An organisation such as Healthcare of Ontario Pension Plan can offer attractive financing levels thanks to the strength of our balance sheet. We have a lot of quality collateral available which we can use to finance different type of assets. Again, I expect that in the next 12 to 18 months this will become a bigger part of our business as the regulatory environment makes it more and more punitive for market participants to hold certain types of collateral.

In Canada, I do not see any risks or regulatory issues in particular to be concerned about as we deal with high quality collateral. We currently do not have any plans to expand our business into emerging markets such as Brazil. We generally stick to markets that we are familiar with but, having said that, if a market participant came to me with a piece of paper, say a Brazilian government security, I would consider it. But I would have to be offered a very attractive financing spread.





Trish Donohue,executive manager of investment management at Cbus Super, the Australian superannuation scheme for the construction, building and allied industries

Cbus currently lends Australian and international equities through our custodian, JPMorgan. All of our Australian equities portfolio is available for lending. The value of assets available to lend at end May 2014 was A$8.7bn ($8.1bn). In terms of our international equities portfolio, approximately 85.6% of it is available for lending.

The value of these assets at the end of May was A$5.1bn. We currently do not have major concerns about our securities lending programme, which we continue to manage actively. Cbus has clear guidelines around the acceptable types of collateral, and the level of collateralisation that is required. We monitor how this is invested and the counterparty risks of the programme very closely.

We accept treasury notes, equities and cash as collateral. Currently, we do not include our bond portfolio in the programme, however we are reviewing this position.


Have your say
  • All comments are subject to editorial review.
    All fields are compulsory.