Luxembourg
08 January 2019
Luxembourg continues to record large net inflows into UCITS, and growth is expected to continue this year as more Luxembourg-domiciled funds commence lending programmes for the first time
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Amidst the busy EU marketplace, Luxembourg holds its own in the niche area of financial services as it remains the largest market for UCITS in Europe. UCITS are synonymous with Luxembourg’s financial market, primarily because it was the first EU member state to implement a framework for the highly-regulated fund-type back in 1988.
Back then, the country attracted a large number of promoters from outside the EU who still use Luxembourg as a gateway to the European market. However, there is fierce competition from other European securities lending markets, most notably Ireland and Germany, who rival Luxembourg in terms of volumes of assets under management.
Discussing the current state of Luxembourg’s securities lending market, Joanna Kzsenzova, associate, securities lending finance, treasury and market services, RBC Investor & Treasury Services Luxembourg, says: “We continue to see relatively stable growth in lendable assets, utilisation and returns year-on-year, although the regulatory environment remains increasingly complex.”
Kzsenzova adds: “In recent years, providers have spent a considerable effort on automation and efficient integration of lending processes with custody and necessary depository controls.”
“However, we are also working proactively with our counterparties to develop new lending strategies and build new relationships. In the current environment, innovation and solutions become real differentiators versus traditional lending.”
In terms of the focus of clients, Kzsenzova noted that clients are paying close attention to their programmes, using it as a revenue optimisation strategy, and engaging closely with providers to adapt their programmes to the dynamic environment.
She highlights that it is now more important than ever to have close relationships and an open dialogue with experienced providers who understand the landscape.
As asset management becomes more complex, Kzsenzova notes that “regulatory requirements have an increasing impact on securities lending activity. The continued need for transparency from asset managers and investors all require tailored solutions”.
She adds: “There is an increasing demand to have securities lending integrated and connected with custody, fund accounting, trading and other services to minimise involvement from asset managers and have a fully optimised package to ensure that risk and costs are jointly addressed.”
Meanwhile, reflecting on 2018, Simon Lee, managing director of Business Development, Europe, the Middle East and Africa (EMEA) and the Asia Pacific, explains: “Over the course of 2018 we saw continued expansion in the number of Luxembourg-domiciled fund structures participating in securities lending programmes.”
Driving the growth
Indeed, Luxembourg has experienced a high degree of success and growth in the area of UCITS. By the end of Q2 2017, the largest net inflows into UCITS were recorded in Luxembourg (€70 billion). Luxembourg also recorded the third largest net asset growth of 0.9 percent for the same period.
Additionally, out of twenty registered countries, Luxembourg recorded the largest inflows (€76.1 billion) during the first three quarters of 2018. This was followed by Ireland with €49.5 billion and France €19.7 billion. The figures show that Luxembourg is well ahead of the mark in this area. In Q3 2018, among the major domiciles, Luxembourg once again ranked as the third largest asset growth with 0.9 percent.
Discussing the growth and success that Luxembourg has seen, Chris Chancellor, senior director, EMEA Insights at Broadridge, comments: “Luxembourg remains the largest market for UCITS in Europe with over 40 percent of the UCITS assets in Europe (Broadridge GMI as at October 2018).”
“Despite a tough year for sales flows and markets generally in 2018, Luxembourg has actually moved this share up from 41 percent (December 2017) to 42 percent. Luxembourg UCITS funds gathered €13 billion, this was around half the flows of rival Dublin but Luxembourg remains the leader with almost triple the assets of Dublin.”
Luxembourg continues to grow for a variety of reasons, Chancellor explains: “As a pan European distribution hub it attracts managers who have interesting strategies that are often not replicated in local markets while at the same time attracting investors not just from Europe but globally—especially from Asia and Latin America.”
He adds: “In 2018, we also saw some Brexit related growth as some groups which were selling UK vehicles across the continent future-proofed their business by creating funds in Luxembourg.”
Lee comments: “Similar to other jurisdictions there are a number of factors driving this growth, firstly an increase in passively managed funds, for whom securities lending is often a key component of the funds’ investment strategy. Secondly, a downward pressure on investment management fees, which may be offset in part by securities lending revenue, and thirdly rising levels of comfort around securities lending brought on by increased transparency, education, and regulation.”
“Luxembourg domiciled lenders continue to utilise a variety of routes to market, including third-party agent programmes, indeed as a third-party lender much of eSecLending’s growth this year in Europe has been from Luxembourg domiciled funds.”
He continues: “While custody lending continues to play its part for many Luxembourg entities, we are also seeing some of the larger fund management companies bring their securities lending programmes in-house, further signifying the value securities lending can provide as an investment management product.”
Kzsenzova cites: “The fact that securities lending requirements defined by the Commission de Surveillance du Secteur Financier (CSSF) are clear to Luxembourg UCITS enables structures to continue to provide liquidity to the market.”
She explains that it also benefits asset managers globally, for example, with greater disclosure requirements, which provides comfort to global investors and makes this product broadly acceptable.
“Historically in several markets, investors still remain restrictive to securities lending, but securities lending is being seen more often as an essential element for management companies and the quality and reputation of the lending programme plays an important role”, Kzsenzova adds.
Focusing on the future
Focusing on the future, Lee comments: “Looking at this year and beyond we see this growth story continuing as more Luxembourg domiciled funds commence lending programmes for the first time, and established lenders look to enhance performance through programme expansion, be that lending in new markets, broadening collateral schedules, or accessing alternative routes to market.”
“As always there will be a focus on regulation over the coming period, particularly surrounding Securities Financing Transactions Regulation and Central Securities Depository Regulation, and of course Brexit will be discussed at length, though accurately predicting how the impact of that shows itself in the securities lending industry is challenging to say the least.”
In terms of opportunities and trends that the industry is expected to face, Kzsenzova notes that one of the current trends is increased corporate governance activity and environmental, social and governance focus.
Kzsenzova explains: “RBC Investor & Treasury Services’ focus is to balance those requirements and find the most optimal solution for investors’ interests with lending and capture benefits from all activities.”
“Another trend is the increasing automation of the securities lending market. Cost-efficient lending via automated platforms increases the importance of engagement with clients to deliver value added trades and provide stable returns to beneficial owners.”
Back then, the country attracted a large number of promoters from outside the EU who still use Luxembourg as a gateway to the European market. However, there is fierce competition from other European securities lending markets, most notably Ireland and Germany, who rival Luxembourg in terms of volumes of assets under management.
Discussing the current state of Luxembourg’s securities lending market, Joanna Kzsenzova, associate, securities lending finance, treasury and market services, RBC Investor & Treasury Services Luxembourg, says: “We continue to see relatively stable growth in lendable assets, utilisation and returns year-on-year, although the regulatory environment remains increasingly complex.”
Kzsenzova adds: “In recent years, providers have spent a considerable effort on automation and efficient integration of lending processes with custody and necessary depository controls.”
“However, we are also working proactively with our counterparties to develop new lending strategies and build new relationships. In the current environment, innovation and solutions become real differentiators versus traditional lending.”
In terms of the focus of clients, Kzsenzova noted that clients are paying close attention to their programmes, using it as a revenue optimisation strategy, and engaging closely with providers to adapt their programmes to the dynamic environment.
She highlights that it is now more important than ever to have close relationships and an open dialogue with experienced providers who understand the landscape.
As asset management becomes more complex, Kzsenzova notes that “regulatory requirements have an increasing impact on securities lending activity. The continued need for transparency from asset managers and investors all require tailored solutions”.
She adds: “There is an increasing demand to have securities lending integrated and connected with custody, fund accounting, trading and other services to minimise involvement from asset managers and have a fully optimised package to ensure that risk and costs are jointly addressed.”
Meanwhile, reflecting on 2018, Simon Lee, managing director of Business Development, Europe, the Middle East and Africa (EMEA) and the Asia Pacific, explains: “Over the course of 2018 we saw continued expansion in the number of Luxembourg-domiciled fund structures participating in securities lending programmes.”
Driving the growth
Indeed, Luxembourg has experienced a high degree of success and growth in the area of UCITS. By the end of Q2 2017, the largest net inflows into UCITS were recorded in Luxembourg (€70 billion). Luxembourg also recorded the third largest net asset growth of 0.9 percent for the same period.
Additionally, out of twenty registered countries, Luxembourg recorded the largest inflows (€76.1 billion) during the first three quarters of 2018. This was followed by Ireland with €49.5 billion and France €19.7 billion. The figures show that Luxembourg is well ahead of the mark in this area. In Q3 2018, among the major domiciles, Luxembourg once again ranked as the third largest asset growth with 0.9 percent.
Discussing the growth and success that Luxembourg has seen, Chris Chancellor, senior director, EMEA Insights at Broadridge, comments: “Luxembourg remains the largest market for UCITS in Europe with over 40 percent of the UCITS assets in Europe (Broadridge GMI as at October 2018).”
“Despite a tough year for sales flows and markets generally in 2018, Luxembourg has actually moved this share up from 41 percent (December 2017) to 42 percent. Luxembourg UCITS funds gathered €13 billion, this was around half the flows of rival Dublin but Luxembourg remains the leader with almost triple the assets of Dublin.”
Luxembourg continues to grow for a variety of reasons, Chancellor explains: “As a pan European distribution hub it attracts managers who have interesting strategies that are often not replicated in local markets while at the same time attracting investors not just from Europe but globally—especially from Asia and Latin America.”
He adds: “In 2018, we also saw some Brexit related growth as some groups which were selling UK vehicles across the continent future-proofed their business by creating funds in Luxembourg.”
Lee comments: “Similar to other jurisdictions there are a number of factors driving this growth, firstly an increase in passively managed funds, for whom securities lending is often a key component of the funds’ investment strategy. Secondly, a downward pressure on investment management fees, which may be offset in part by securities lending revenue, and thirdly rising levels of comfort around securities lending brought on by increased transparency, education, and regulation.”
“Luxembourg domiciled lenders continue to utilise a variety of routes to market, including third-party agent programmes, indeed as a third-party lender much of eSecLending’s growth this year in Europe has been from Luxembourg domiciled funds.”
He continues: “While custody lending continues to play its part for many Luxembourg entities, we are also seeing some of the larger fund management companies bring their securities lending programmes in-house, further signifying the value securities lending can provide as an investment management product.”
Kzsenzova cites: “The fact that securities lending requirements defined by the Commission de Surveillance du Secteur Financier (CSSF) are clear to Luxembourg UCITS enables structures to continue to provide liquidity to the market.”
She explains that it also benefits asset managers globally, for example, with greater disclosure requirements, which provides comfort to global investors and makes this product broadly acceptable.
“Historically in several markets, investors still remain restrictive to securities lending, but securities lending is being seen more often as an essential element for management companies and the quality and reputation of the lending programme plays an important role”, Kzsenzova adds.
Focusing on the future
Focusing on the future, Lee comments: “Looking at this year and beyond we see this growth story continuing as more Luxembourg domiciled funds commence lending programmes for the first time, and established lenders look to enhance performance through programme expansion, be that lending in new markets, broadening collateral schedules, or accessing alternative routes to market.”
“As always there will be a focus on regulation over the coming period, particularly surrounding Securities Financing Transactions Regulation and Central Securities Depository Regulation, and of course Brexit will be discussed at length, though accurately predicting how the impact of that shows itself in the securities lending industry is challenging to say the least.”
In terms of opportunities and trends that the industry is expected to face, Kzsenzova notes that one of the current trends is increased corporate governance activity and environmental, social and governance focus.
Kzsenzova explains: “RBC Investor & Treasury Services’ focus is to balance those requirements and find the most optimal solution for investors’ interests with lending and capture benefits from all activities.”
“Another trend is the increasing automation of the securities lending market. Cost-efficient lending via automated platforms increases the importance of engagement with clients to deliver value added trades and provide stable returns to beneficial owners.”
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