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