Canada
29 June 2010
While not immune to the devastation in the banking sector seen south of the border, the Canadian market has remained relatively stable
Image: Shutterstock
Being the neighbour of the largest financial market in the world has its positives and its negatives, but as the glare of the spotlight focused on Wall Street, the Canadian securities lending market was quietly going its own way. It’s one of the few major Western economies that didn’t need to bail out any of its banks.
That’s not to say there haven’t been some major upheavals. By October of 2008, around $900 billion in securities were available for lending in Canada, with less than 10 per cent of that figure actually on loan. The market fell sharply following the demise of Lehman Brothers, and has yet to make a full recovery - the S&P/TSX rose by 36 per cent throughout 2009 to reach a high of 11,779 on December 2. It’s since gone higher, but 2010 has not seen any significant growth, and at the time of writing, was hovering around the 11,700 mark.
“To be honest, this is fairly good news for Canada,” says one participant. “While it would be great to be making loads of money, it’s more important for us at the moment to have a stable climate, and for companies to regain confidence in our markets and models.”
The market is dominated by four major players. State Street, Northern Trust, CIBC Mellon and RBC Dexia control about 90 per cent of the market. New players are starting to assert themselves, however, and it’s expected that the already healthy competition is expected to become more intense. “When the markets went into meltdown, we looked at Canada and the firms there were still doing ok,” says a representative of a large global bank with a big presence in Canada but a small footprint in the securities lending arena. “As one of the territories that has withstood the downturn better than most, we are increasingly looking at building our presence here and making a play for some of the bigger business.”
Following the moves made by regulators in the US and UK, a temporary short selling ban was placed on the Canadian market by the Ontario Securities Commission, which oversees trading on the Toronto Stock Exchange, and the regulator has not ruled out further intervention should circumstances demand it.
However, earlier this year, the TMX Group, owner of the Toronto Stock Exchange, warned the
regulators that introducing short selling rules similar to the circuit breaker regulations set up in the US would prove detrimental to the Canadian market.
In the US, the SEC proposed a system that would bar short selling on stocks that fell 10 per cent in a single day. TMX pointed out that Canada had not seen the levels of ‘abusive’ short selling that had happened in the US and other countries. It added that existing rules that had been updated in the Investment Industry Regulatory Organisation of Canada amendments already provided enough protection.
“TMX Group believes that additional regulation of short sales in Canada is not warranted,” said TMX Group CEO Tom Kloet. “In our view, adopting the recently-amended US rules around short sales would add unnecessary costs to the industry without resulting in a corresponding benefit to investors. We are confident that the Universal Market Integrity Rules (UMIR) short selling rules, combined with vigilant surveillance and enforcement by IIROC provide protection to our market.”
According to the Financial System Review 2010, published by the Bank of Canada, the risks to the stability of both the Canadian and the global financial systems appears to have diminished over the past year. But counterparty risk remains a serious concern, and the exposure of many financial institutions to the sovereign debt of some countries means risks do remain.
However, the Canadian financial system has done well. Capital and liquidity positions of Canadian institutions have improved since the start of the year and the markets have remained resilient. Funding issues remain, however, although Canada’s banks remain in the top tier when it comes to the global markets, and domestic markets are holding up well.
And the Bank of Canada is also set to remove the facility to provide Canadian-dollar liquidity in the event of another crisis. This is due to come to an end by mid-July.
“Canada is never going to be the most dynamic market for securities lending,” says one insider. “But to be honest, we prefer it that way. It means that while we may never see the highs that some markets had before 2008, we’re never going to suffer such great lows as they had in the last 18 months.”
That’s not to say there haven’t been some major upheavals. By October of 2008, around $900 billion in securities were available for lending in Canada, with less than 10 per cent of that figure actually on loan. The market fell sharply following the demise of Lehman Brothers, and has yet to make a full recovery - the S&P/TSX rose by 36 per cent throughout 2009 to reach a high of 11,779 on December 2. It’s since gone higher, but 2010 has not seen any significant growth, and at the time of writing, was hovering around the 11,700 mark.
“To be honest, this is fairly good news for Canada,” says one participant. “While it would be great to be making loads of money, it’s more important for us at the moment to have a stable climate, and for companies to regain confidence in our markets and models.”
The market is dominated by four major players. State Street, Northern Trust, CIBC Mellon and RBC Dexia control about 90 per cent of the market. New players are starting to assert themselves, however, and it’s expected that the already healthy competition is expected to become more intense. “When the markets went into meltdown, we looked at Canada and the firms there were still doing ok,” says a representative of a large global bank with a big presence in Canada but a small footprint in the securities lending arena. “As one of the territories that has withstood the downturn better than most, we are increasingly looking at building our presence here and making a play for some of the bigger business.”
Following the moves made by regulators in the US and UK, a temporary short selling ban was placed on the Canadian market by the Ontario Securities Commission, which oversees trading on the Toronto Stock Exchange, and the regulator has not ruled out further intervention should circumstances demand it.
However, earlier this year, the TMX Group, owner of the Toronto Stock Exchange, warned the
regulators that introducing short selling rules similar to the circuit breaker regulations set up in the US would prove detrimental to the Canadian market.
In the US, the SEC proposed a system that would bar short selling on stocks that fell 10 per cent in a single day. TMX pointed out that Canada had not seen the levels of ‘abusive’ short selling that had happened in the US and other countries. It added that existing rules that had been updated in the Investment Industry Regulatory Organisation of Canada amendments already provided enough protection.
“TMX Group believes that additional regulation of short sales in Canada is not warranted,” said TMX Group CEO Tom Kloet. “In our view, adopting the recently-amended US rules around short sales would add unnecessary costs to the industry without resulting in a corresponding benefit to investors. We are confident that the Universal Market Integrity Rules (UMIR) short selling rules, combined with vigilant surveillance and enforcement by IIROC provide protection to our market.”
According to the Financial System Review 2010, published by the Bank of Canada, the risks to the stability of both the Canadian and the global financial systems appears to have diminished over the past year. But counterparty risk remains a serious concern, and the exposure of many financial institutions to the sovereign debt of some countries means risks do remain.
However, the Canadian financial system has done well. Capital and liquidity positions of Canadian institutions have improved since the start of the year and the markets have remained resilient. Funding issues remain, however, although Canada’s banks remain in the top tier when it comes to the global markets, and domestic markets are holding up well.
And the Bank of Canada is also set to remove the facility to provide Canadian-dollar liquidity in the event of another crisis. This is due to come to an end by mid-July.
“Canada is never going to be the most dynamic market for securities lending,” says one insider. “But to be honest, we prefer it that way. It means that while we may never see the highs that some markets had before 2008, we’re never going to suffer such great lows as they had in the last 18 months.”
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
