An interview with Michael Saunders, head of investments & trading, securities services North America BNP Paribas.

Can you outline the strategies/trade types that are proving efficient and effective for both lenders and borrowers in the current market environment?

Current market participants continue to engage in lending to derive incremental income on their idle assets. The limited number of specials in the market has provided opportunities for beneficial owners to seek new strategies to increase revenues. Specifically, clients across our global platform with an intrinsic only program have started examining alternative lending strategies to increase revenues. Collateral transformation and the demand for HQLA is a prime example of lenders adopting new strategies. The focus of monetizing the demand and utilizing the high-quality collateral in their portfolios adds immediate value to both lenders and borrowers.

The steepening of the Libor curve provides an additional opportunity for beneficial owners to capture higher yields on their reinvestment portfolio. Certainly, the ability to lend general collateral and in turn reinvest the cash collateral into a pool of diversified money market instruments is another pocket lenders can incorporate into their program to derive a return in the current environment.

While the above strategies are consistent with a majority of market participants, we find revenues continue to be driven by a combination of specials, general collateral lending and corporate actions trading. The ability of lenders and agents to incorporate a combination of the above, along with opening new markets and examining new trade structures all assist in generating enhanced program revenues.

What’s behind the robust demand to pledge non-cash collateral, particularly US, Canadian & European debt?

The regulatory schemes which place greater emphasis on liquidity and capital requirements have prompted financial institutions to more closely monitor their balance sheets and liquidity. The ability to pledge securities as collateral helps a financial institution preserve its liquidity position and put more assets in use, greatly enhancing its liquidity profile, as well as its financial flexibility. The focus on balance sheet allocation naturally shifts the demand to borrow to non-cash transactions, which offer broker dealers an opportunity to net and move transactions off  balance sheet. As such, non-cash collateral-based transactions are less balance sheet-intensive than cash collateral-based transactions, hence the growth in non-cash collateral. Our program at BNP Paribas is experiencing this trend across our global locations. 

As BNP Paribas continues its US expansion, how would you gauge the current appetite from different types of asset owner clients (both existing and potential) towards securities lending?

Our global beneficial owner clients continue to increase their level of engagement. Current lenders have increased their willingness to analyze proposals which directly correlate to higher revenues, increased utilization rates and greater risk protections. Non-cash collateral lending, a broader collateral policy and non-traditional counterparties and trade structures are all prime examples of this shift in their approach to lending.

Beneficial owners currently not involved in lending are also shifting their approach as the realization of opportunity cost is becoming a reality. As such, prospects are requiring a deeper breath of education on the current market. The result recently has been the recognition that the securities finance industry has indeed changed. We are seeing elevated participation rates of new participants coming into the market. Most of this new supply is generated from asset owners with large pools of HQLA seeking a return who previously were adamantly opposed to lending or unaware that there was robust demand for their supply of assets.  This trend is representative of our conversations with prospects around the world.

From a securities lending perspective, Latin America continues to play catch up when compared to the US. How do you rate the region’s potential?

BNP Paribas has committed substantial resources and capital recently to grow our presence not only in the Americas but in new regions. In particular, our presence in São Paulo, Brazil and Bogota, Colombia demonstrates our global footprint and commitment to Latin America. Our agency lending business is leveraging this local presence to serve a variety of asset owners and asset managers in the region while identifying additional opportunities. As the world’s fifth largest global custodian, our securities lending team utilizes our local resources to examine lending opportunities in the LatAm markets.

The region certainly presents opportunities despite the hurdles in several markets to lend. Interest from beneficial owners in the region remains robust. As BNP Paribas continues to grow our presence in the region, agency lending will become a significant driver of revenues for clients in the region and across the globe.