As Abu Dhabi Investment Authority (ADIA) celebrated its 40th anniversary last year, the world’s second largest sovereign wealth fund also bade farewell to one of its most loyal servants when Sudha Datta decided to hang up his boots.

An accountant by trade, Datta first joined ADIA in 1981 after a short spell working as a consultant for Price Waterhouse, now PwC. For the next decade he carried out investment portfolio accounting, valued assets and prepared statements as the UAE sovereign grew in size.

A spell in Toronto in the early nineties followed, during which Datta built up a successful  tax and advisory practice for small businesses before going on to balance the books for Purolator Courier then the largest distribution company in Canada.

ADIA lured Datta back in 1996 and there he remained for the next twenty years, eventually becoming head of operations. In practice, Datta’s role at the fund saw him forge close ties with custodians, lending agents, brokers, fund managers, tax and legal advisors globally.

Across securities services, he became the fund’s key decision maker and much of his time was spent conducting due diligence visits, selecting providers and negotiating legal and service level agreements. Ultimately though, he had to convince individuals further up the chain - ADIA’s Investment Committee – to follow his judgement. 

“It wasn’t always easy,” he told Global Investor/ISF. “AIDA was and indeed remains a highly conservative long-term player. Securities lending, for example, was talked about from the moment I joined but took years to get off the ground.”

In 1999, three years into Datta’s second stint at the sovereign, ADIA decided to create a dedicated operations department. Fortunately for Datta, an individual with an investment background became executive director of the department and moved into the unit to accompany him. The pair then raised the topic of securities lending again.

“Eventually we began to lend fixed income securities before moving to equities” he explained. “It was a long, gradual journey.  All of our lending was conducted through agents, never on a principle basis. That remains true today.”

Ultimately the balance sheet strength of the agent banks was crucial to ADIA’s Investment Committee engaging in the idea of stock loan in the first place. Primarily, Datta’s selection process involved a financial assessment of the bidders before he even considered a closer inspection of how each agent ran their lending desk. Once a decision was made, he gave complete independence to lending agents as long as they stuck to guidelines.

For the next eight years the sovereign continued its securities lending program earning substantial income in the process. Datta and his team focused on bench marking performance and carefully monitoring risk. The fund celebrated its most profitable year from stock loan in 2007, before the financial crisis ensued and lending came to a halt.

“Securities lending operations ceased for a couple of years,” Datta recalls. “However, we never lost a dime from securities lending during the crisis. It turned out to be a proud moment in my career. Looking back though, I can’t thank ADIA’s investment committee enough.”

Taking on extra risk to secure an additional basis point was never an option for Datta and ADIA’s lending agent. Crucially, those on the fund’s investment committee were very particular when it came to cash reinvestment. Indemnity was in place against borrowers along with strict guidelines on collateral.

In 2010, ADIA restarted its securities lending program using multiple agents. By that time, Datta said awareness of securities lending had dramatically improved. Moreover, people began to appreciate the idea of indemnifying cash reinvestment. “That’s been a huge shift,” he said.

Despite awareness improving, Datta reckons the industry still has a job to do to educate the mainstream media.

“With all due respect to reporters, much of the media missed how big the securities lending market was at the time of the crisis. Short selling, for example, was and probably still is viewed as the one of the main culprits, but it’s important to remember that it’s only one component of lending.”

Now, Datta reckons the practice of loaning out stocks and bonds has become crucial part of the financial system, particularly when it comes to liquidity. 

Last year a BNY Mellon study found that sovereign wealth funds are looking to expand their use of securities lending to grow returns, reduce costs and mitigate some of the threat to global liquidity that market participants are facing from regulations. The survey found most expect to earn an additional return of five to eight basis points from doing so.

“I don’t think that amount of return is achievable,” Datta said, commenting on the study. “Moreover, you have to think about demand. If all sovereigns are ready to lending the supply would be there, but what about demand? It would have to increase substantially.

Having dealt with and lent through virtually every major lending agent over the years, including JP Morgan, State Street, BNY Mellon and Deutsche Bank, RBC, and Northern Trust, Datta moved back to Toronto last year and is now offering his unique buy-side perspective on stock loan and custody as a consultant.

“Over the years, I have had the chance to see various service providers. I know what I like and don’t like about their service model. Hopefully my experience can help North American mutual funds, endowments and pension funds with their decisions.” He is offering his consulting and advisory services through SL&C Consulting Inc.

Datta will deliver the opening address at the IMN’s 23rd Annual Beneficial Owners’ International Securities Finance & Collateral Management Conference in Florida on February 1.