Ahead of Finadium’s Investors in Securities Lending conference (FISL), we speak with our panelist experts from S&P Global Market Intelligence and Northern Trust on what everyone should know about the revenue outlook and how accessing liquidity to boost performance is changing.
Securities lending revenues are at record levels, reaching $3.4 billion globally in the first quarter (Q1) and chalking up the best Q1 since 2008. The biggest returns came from US equities, led by specials, representing $1.4 billion of the global total and a 45% increase year-over-year (yoy), according to data from S&P Global Market Intelligence.
“When we see an elevated specials market, that generally means revenues are trending in a positive direction for the rest of the year,” said Melissa Gow, head of Client Relationships for Securities Finance, ETP and Benchmarking Services at S&P Global Market Intelligence, who will be speaking on the “Optimizing Demand” panel at FISL.
Fixed income continued to outperform, and corporate bonds set new records while government bond revenues were also strong. For all these asset classes average fees increased. Overall, the majority of Europe, Middle East and Africa (EMEA) markets saw double digit increases in both revenues and fees. March-related banking turmoil did see a boost in short interest, but it was short-lived, Gow noted.
Bucking the trend were ETFs, with the quarter reflecting the volatility of investor flows and market sentiment related to the US banking turmoil. ETFs were the star performer during 2022 but lending revenues declined 25% yoy in Q1, fueled by both declining fees and balances.
Quantitative vs. qualitative
With the bulk of revenues coming from a very active specials market, Gow explained that this also meant a highly concentrated market and consequently, not distributed evenly: “If you look at this data, you would have every reason to believe that everybody should be making record revenues and that is not the case…Performance is but one part of a well-managed governance framework for a securities lending program and we spend so much time talking about the numbers, but the qualitative part is equally as important and can have a significant impact on the quantitative side.”
As market participants continue to require increasingly sophisticated data systems to identify opportunities as close to real-time as possible, there’s also a growing ecosystem to take advantage of executing on them.
Custodians support a wide array of client types, with various services built around the buy-side. In some cases, traditional sell-side firms are integral to those services but there are also opportunities to pair off clients to transact directly, said Judson Baker, senior vice president for Securities Finance and Collateral Services Product Manager at Northern Trust, who will be speaking on the “Securities lending as part of liquidity platforms” panel.
The client segments accessing liquidity platforms include pension funds, sovereign wealth funds and, to some extent, hedge funds as well as insurance funds. Within each segment, motives and requirements vary significantly, he noted.
For example, sovereign wealth funds may have a common objective: they’re seeking alpha. But defined benefit plans will differ based on whether the program is fully funded. And then there are regulatory drivers across jurisdictions, with Baker pointing to Uncleared Margin Rules (UMR) in particular because of the corresponding need to locate eligible assets to meet their margin obligations: “All major markets have comparable UMR patterns (but) the clients’ contents of portfolios, objectives and use of derivatives may differ.”
Collateral eclipse
One of the major trends impacting the industry is the “eclipsing” between collateral, derivatives, securities lending and repo, Baker noted. An investment manager or asset owner, for example, does not want their core portfolio construction strategy disrupted but may not naturally have assets that meet the eligible rules negotiated within their margin agreements and will need to upgrade collateral. On the other side of that trade could be a beneficial owner or sovereign wealth fund flush with cash or government securities.
“There’s a growing capability out there between the buy-side to do that type of peer-to-peer trade, so they can step away from the traditional sell-side being a linchpin to finance and liquidity solutions,” Baker said. “In some cases, it’s critical to have that partnership with sell-side banks and in other cases we’ll find that there’s more of an appetite by the buy-side firms to trade directly amongst themselves.”
But the growing ecosystem is complex, with legal, risk, and technology requirements coming into play to stand up a liquidity platform, he warned: “It isn’t necessarily turnkey for organizations (and) that opens an opportunity for firms to level that playing field for the buy-side.”
Judson and Melissa will be joined on their panel discussions by colleagues from BNY Mellon, Citi, eSecLending, Fidelity, Invesco, J.P. Morgan and State Street for FISL, which takes place in New York City from May 17 to May 18. It is our 7th annual conference bringing together a broad cross-section of the industry to share expert insights and is free for qualified buy-side firms including asset owners, asset managers, insurance firms and hedge funds. Register here.