Securities lending perceptions changing Down Under
The practice of lending out stocks and bonds is becoming a more understood, accepted and widely adopted activity among Australian funds, industry experts claim.
Often seen as high risk and simply
a straight proxy for short selling, the wider securities lending industry was demonised by the Australian press following the financial crisis.
However, as education and
industry practices have improved, perceptions among investment houses have
started to shift, particularly among the large superannuation funds.
“The global financial crisis was really the first major market event to exposed the gravity of counterparty and cash reinvestment risk within the securities lending market,” said Dane Fannin, head of capital markets APAC at Northern Trust.
“However, the securities lending product has since evolved as a cleaner and more flexible offering and the industry is dealing with these risks more robustly. Programs can now be fine-tuned and customised to enable clients the ability to deploy the necessary ‘speed bumps’ to mitigate risks and achieve the desired level of risk and reward for the product.”
Fannin was speaking at Global Investor/ISF’s 5th Australia Securities Finance Masterclass in Sydney earlier this month.
Malcolm Poes, senior treasury
manager at AustralianSuper - a $100bn pension fund, was also in attendance.
Poes joined the fund in 2012
and was tasked with, among other things, rejuvenating AustralianSuper’s
securities lending operation.
“Securities lending took a
backward step after the financial crisis, there wasn’t a heavy focus on keeping
up to date,” he admitted. “I looked at what could be improved. This
involved accessing income generation, utilization rates, risks and new
opportunities.”
Getting all of his relevant
colleagues engaged, educated and onboard was tough, Poes recalled, joking that
he made plenty of ‘new friends’ along the way.
“Portfolio managers, tax
& compliance teams, auditors, senior managers and ultimately the board –
there had to be extensive and direct communication with all divisions
internally.”
So much so that Poes
developed a FAQ sheet on securities lending with 78 questions he knew would be
coming his way.
“You have to answer concerns
and demonstrate the fact that yes, you have exposure in a securities lending
program, but you’re dynamically marked to market every day and there’s an
exceptionally low probability of a default.”
When agreed upon, Poes added
that securities lending has to be done properly.
“Putting this type of
investment activity at the back of the queue and checking a program once a
month isn’t an option.
“That heightens risk and
wastes the opportunity of a close relationship with an agent lender, who can
help generate meaningful income that can eventually be deployed elsewhere
within the fund.”
Another panelist at the
event, Natalie Floate, head of ALM, FX & agency lending, Asia-Pacific, BNP
Paribas Securities Services, echoed Poes’ points.
“We’ve found a number of
different dynamics and attitudes toward securities lending in Australia and
elsewhere in the APAC region, particularly between those that have or haven’t
lent previously.
“In Australia, finding the
key stakeholders is crucial. There may be individuals who have a certain view
on securities lending or experienced a bad situation previously.
“Our job is to reach the
right individuals, understand their concerns, walk through them through those
issues and explain potential benefits.”
Engagement
Across the board, panelists
agreed that engagement levels had improved markedly within the last few years,
particularly in Australia.
Sam Watkins, executive
director securities division, Goldman Sachs Australia, said there are two key
reasons.
“When it comes to securities
lending, most of the conversations are actually occurring on the demand
(borrowing) side,” Watkins explained.
For example, he noted a
strong demand for high quality liquid assets (HQLA) due to Basel III’s
Liquidity Coverage Ratio.
The requirement to hold
increased levels of HQLAs is creating consistent borrowing demand for
government bonds and, in turn, an opportunity for asset owners.
Another reason for increased
engagement from the lending community is indemnification.
“Indemnified programs require
agent lenders to hold more capital,” Watkins added. “As a result there’s a
greater focus on indemnified trades and the way that insurance is used.
“If you’re a beneficial owner
and you’re not indemnified, the risk sits squarely with you, hence why
engagement from asset owners has increased so much and will continue to do so.”
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