Our annual Finadium Investors in Securities Lending (FISL) conference in New York is this week and in the last of our preview articles (check out our first and second), we talk to our panelist experts from BNY Mellon and Fidelity Agency Lending about how new entrants are negotiating a dynamic markets backdrop.
Securities lending programs should be characterized by a broad set of parameters that are efficient in multiple market scenarios, said Shane Parks, director for Securities Finance Business Development at BNY, who will be speaking on the Who else is lending: how and why? panel. Among those parameters are collateral guidelines, which can be cash, non-cash or some combination of the two that could include global sovereign debt, corporate debt and equities, he explained.
Over the last two years, some trade demand moved away from equity general collateral (GC) lending and into providing financing structures for equity assets. As equity financing needs became a focus, demand rotated into US Treasury lending vs equity collateral. BNY clients with collateral guidelines that allow equities saw outsized revenue, he said.
Last year for example, the big trade opportunity was to support the long skew in the market and consequently, equity financing transactions. In other words, cash collateral guidelines could have considered equity repo on a term basis or accepting equities collateral, he explained: “If you had a wide set of parameters which allowed for equities as collateral, you would have seen more of an offset in some of those decreases in revenue on the equity side, as an increase on either upgrade trades, or repo investments.”
Cash collateral reinvestment options are another parameter to weigh for overnight versus duration, which directly impacts yield from securities lending activity, he added: “If clients go out in duration and invest into equities for repo or invest into a longer duration of investments beyond overnight, then we are able to return a yield in that cash collateral reinvestment to maintain a stable return in lending.”
Stability, Parks said, is a tall order in the securities lending markets, and among the best options is having access to the maximum number of routes.
All-time high
Market participants are taking a creative and innovative lens towards multiple solutions in a way that hasn’t been true in a decade or more, said Yuri Brightly, senior vice president and head of Securities Finance Platform at Fidelity Agency Lending, who will be speaking on the Technology as a key business driver for everyone in the securities finance value chain panel.
“Volumes continue to grow, transactions continue to grow, the need for firms to be able to scale and be efficient both internally and then across trading counterparties, continues to be very important,” he said. “Those firms that can invest and can push innovation are the ones that, in the long term, reap the benefits.”
Along with market growth however, there’s also requirements for supervision and oversight of technologies, he added: “The greater that we can automate, that’s very good but just as important is to be able to have real time surveillance of those technology to have transparency back to human eyes and to make sure that they’re continuing to look at them, and optimizing these features and functionalities to make sure they are creating the best outcome for their particular firm.”
Fidelity is boosting its analytics, operational and trading tools at a time when options for market connectivity industry wide are proliferating. What beneficial owners want is for agent lenders to be performing these services on their behalf, not using them directly, he said.
“Firms seem to be looking to increase connectivity with each other and go about being able to perform transactions, agreements in different ways that may not have been contemplated before and there seems to be an all-time high between interest of parties and number of vendors taking new ideas to the marketplace.”
BNY’s Parks said that all players can be “members of an efficient ecosystem that evolves and solves for market necessities”, supporting both specialized lenders and capital efficiency-focused borrowers.
New entrants into lending, he added, are complements more so than direct competitors and find opportunities to challenge the status quo that, in turn, spur innovation of BNY’s program: “What I perceive is an opportunity to (compare notes) with other folks who are doing similar transactions, while solving for a market need…That allows for thought generation (and a) better and more efficient market around us.”
Shane and Yuri will be joining colleagues from Aquiline Capital Partners, GLMX, Options Clearing Corporation (OCC), Provable Markets, RBC Capital Markets and Vanguard, at FISL, which takes place in New York from May 14 to 15. It is our 9th annual conference bringing together a broad cross-section of the industry to share expert insights on the latest and most important developments in securities lending. Registration is free for qualified buy-side firms including asset owners, asset managers, insurance firms and hedge funds.