Regulation, the macro market environment, and new ways of doing business were the topics of a panel scrutinizing the changing dynamics in securities lending markets at Finadium’s Investors in Securities Lending conference in London.
In general, the attitude towards global regulations is that they’re here to stay, and maybe even increase, regardless of global political upheavals. And some of the advice is to just get on with it and embrace the new opportunities that come with them.
Though regulations are driving change, they are also increasing costs at a time when revenues are down across the industry. This year’s first quarter is broadly down some 10%, equities is down about 20%, while fixed income, long rumoured to be dead, has been a bright spot, up approximately 30%.
For lenders, optimizing revenues in the future is going to mean being engaged, said Paul Wilson, Global Head of Agent Lending Product & Portfolio Advisory at J.P. Morgan, speaking to SFM. As the market has adjusted to a post-crisis world, one of the major differentiators coming through for lenders is that all things being equal, the lender that is willing to be a bit more engaged could make “materially more money”, he added.
“If a lender wants to optimize the revenue that they can make from a cash stock option for example, they need to notify the agent quickly whether they are going to take cash or are going to take stock, and the premium you can get for giving a firm commitment to take cash versus being undecided is material,” said Wilson. “It can be 50% higher…so it could be 50 to 60 basis points.”
This hands on approach is creating differentiation at a time when more and more business is transacted on a fully automated basis, and automation means quicker and cheaper: “It’s the vanilla business and volume that you really want to be automated. Cost is going up, spreads are declining, so by definition you are getting squeezed. The business has got a two tier process, high levels of automation on the majority of the business and a lot of focus on the structured side that really needs to be managed, and that’s the current state of play.”
Speaking to SFM, Steve Kiely, EMEA Head of Sales and Relationship Management, Securities Finance at BNY Mellon, said that most agent lenders are doing the bulk of business in an automated style now. And that means freeing up “trader capacity” to focus on intrinsic value trades.
Moreover, it’s the “nature of the beast” that spreads tighten as markets mature. “There was a period a number of years ago, we were opening up new seclending markets and because of their nature – they are new, they are developing markets – those spreads are wider. As it becomes commoditized, (spreads) will come in.”
He also pointed out that although securities lending markets have always had themes and trends, they seem to be coming and going a lot quicker than they used to. “That requires an element of flexibility and open-mindedness from all parties.” Kiely noted collateral flexibility and term trades as two areas that should be closely watched for revenue generation.
On the panel, flexibility was discussed across a variety of functions, for example: lending without indemnification for higher fee splits.
Clients willing to do this are in the minority, said one panelist, noting that such funds tend to be asset managers with intrinsic value programs, high levels of collateral quality, and small balances on loan. Another panelist noted that there is a clear difference in attitude between existing and new lenders, one of which even requested a repricing for comparison while being onboarded. This may become more common for new clients joining the securities lending market for the extra alpha and yield.
Flexibility was also one of the panel suggestions for lenders with higher-rated RWA assets that may get side-lined because of borrower balance sheet management. Those lenders may be able to offset negative impacts by being open to transactions that are “borrower-friendly”, such as term structures or taking equities as collateral.
Speaking to SFM, BNY Mellon’s Kiely summed it up this way: “The market is more varied, and therefore, all three players in the agency lending model – the borrower from the demand side, the beneficial owner from the supply side, and the agent lender – all need to be, and are being, more nimble and flexible in how they do things.”