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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
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
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
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 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
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
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.