Switzerland
15 May 2012
SLT talks to Oliver Madden of RBC Dexia Investor Services to get his take on Switzerland’s securities lending market and how it has evolved since the 2008 credit crisis
Image: Shutterstock
The credit crisis of 2008 will influence popular opinion on financial institutions and the ways they do business for a long time to come. But many jurisdictions have been trying to learn their lessons from the disaster. Europe is awash with regulation, such as the Alternative Investment Fund Managers Directive and Basel III, that are aimed at tightening the rules and regulations that govern the continent’s financial institutions, regardless of their shape or size.
Switzerland has not bucked the trend in this regard. The jurisdiction has looked to tighten the securities lending industry with regulation, and this has affected the ways in which market players do business. Oliver Madden, who is the director of technical sales and market products and services at RBC Dexia Investor Services, explains.
How does the Swiss securities lending market differ from other European markets?
Historically, the predominance of principal lending models existed to a much greater extent than other markets but today in most respects it is no different to any other major market—well structured with a choice of routes to market available and with knowledgeable market participants and beneficial owners.
What is the regulatory landscape like in Switzerland at the moment?
In relation to securities lending, what we saw following the credit crisis in 2008 was a measured consultation and review of the market through 2009 that ultimately led to the implementation of FINMA (the Swiss Financial Market Supervisory Authority) Circular 10/2 in 2010. The circular details the rules pertaining to securities lending transactions with clients. Whilst conservative they also provide a transparent, consistent and robust framework for market participants, which are very much positives and all one can ask for—from a regulation and a regulator.
How will Basel III affect business
in Switzerland?
Basel III is one of a number of global regulatory initiatives that is having a significant impact on securities lending for all participants, not just in Switzerland. Basel III is changing the way banks manage their liquidity and has driven demand from borrowers for quality assets (in particular government bonds) and for term trades.
We’re spending a lot of time talking with our clients about these trades, educating them about the key points to be considering, walking them through the underlying motivation and outlining how their returns may be enhanced.
Once clients understand the requirements and returns of the trades, and how we support them through it, they’re in a position to make an informed decision. It’s a trade where borrowers are willing to pay a healthy premium for certainty of supply of the right assets. It’s an important conversation to be having.
Who are the big beneficial owners involved in securities lending in Switzerland and why does it appeal to them?
Given the depth and breadth of assets held, Switzerland has always had a diverse pool of beneficial owners, from pension funds, insurance companies and fund management companies through to private clients. Historically, they may not always have been visible given the principal lending model that has prevailed. Today, however, Swiss beneficial owners access the market in a number of different ways.
Securities lending appeals to Swiss clients because they see the benefits to fund performance or reducing costs that the revenue from securities lending provides. Swiss clients, as a rule, are conservative; however, they are also knowledgeable about the product. They appreciate the strong regulatory framework that exists and value the returns they can earn. What we see are informed beneficial owners selecting their route to market based on what best fits their risk, operational and reward requirements.
How have collateral type choices changed in recent years?
What we’ve seen in the last five years is beneficial owners taking the time to revisit and assess their programme parameters and make adjustments necessary to ensure the continued viability of their programmes—but all within prudent and tolerable risk frameworks. The type of collateral accepted is one of these parameters and, generally, we witnessed in the immediate aftermath of the credit crisis a shift away from cash collateral and towards more conservative non-cash collateral options. In the last two years, we’ve seen an increasing recognition of the value of collateral liquidity as well as quality plus correlating the loan and collateral sides of the trade. For these reasons, main index equities in particular have become more widely accepted.
How has the securities lending industry handled the negative press that it has received?
Securities lending has faced its own particular challenges. It’s to its credit that the various trade associations that represent the industry have worked collaboratively and proactively, and continue to do so, to address those issues, to engage the media, and most importantly, to raise awareness with, and educate, beneficial owners
Switzerland has not bucked the trend in this regard. The jurisdiction has looked to tighten the securities lending industry with regulation, and this has affected the ways in which market players do business. Oliver Madden, who is the director of technical sales and market products and services at RBC Dexia Investor Services, explains.
How does the Swiss securities lending market differ from other European markets?
Historically, the predominance of principal lending models existed to a much greater extent than other markets but today in most respects it is no different to any other major market—well structured with a choice of routes to market available and with knowledgeable market participants and beneficial owners.
What is the regulatory landscape like in Switzerland at the moment?
In relation to securities lending, what we saw following the credit crisis in 2008 was a measured consultation and review of the market through 2009 that ultimately led to the implementation of FINMA (the Swiss Financial Market Supervisory Authority) Circular 10/2 in 2010. The circular details the rules pertaining to securities lending transactions with clients. Whilst conservative they also provide a transparent, consistent and robust framework for market participants, which are very much positives and all one can ask for—from a regulation and a regulator.
How will Basel III affect business
in Switzerland?
Basel III is one of a number of global regulatory initiatives that is having a significant impact on securities lending for all participants, not just in Switzerland. Basel III is changing the way banks manage their liquidity and has driven demand from borrowers for quality assets (in particular government bonds) and for term trades.
We’re spending a lot of time talking with our clients about these trades, educating them about the key points to be considering, walking them through the underlying motivation and outlining how their returns may be enhanced.
Once clients understand the requirements and returns of the trades, and how we support them through it, they’re in a position to make an informed decision. It’s a trade where borrowers are willing to pay a healthy premium for certainty of supply of the right assets. It’s an important conversation to be having.
Who are the big beneficial owners involved in securities lending in Switzerland and why does it appeal to them?
Given the depth and breadth of assets held, Switzerland has always had a diverse pool of beneficial owners, from pension funds, insurance companies and fund management companies through to private clients. Historically, they may not always have been visible given the principal lending model that has prevailed. Today, however, Swiss beneficial owners access the market in a number of different ways.
Securities lending appeals to Swiss clients because they see the benefits to fund performance or reducing costs that the revenue from securities lending provides. Swiss clients, as a rule, are conservative; however, they are also knowledgeable about the product. They appreciate the strong regulatory framework that exists and value the returns they can earn. What we see are informed beneficial owners selecting their route to market based on what best fits their risk, operational and reward requirements.
How have collateral type choices changed in recent years?
What we’ve seen in the last five years is beneficial owners taking the time to revisit and assess their programme parameters and make adjustments necessary to ensure the continued viability of their programmes—but all within prudent and tolerable risk frameworks. The type of collateral accepted is one of these parameters and, generally, we witnessed in the immediate aftermath of the credit crisis a shift away from cash collateral and towards more conservative non-cash collateral options. In the last two years, we’ve seen an increasing recognition of the value of collateral liquidity as well as quality plus correlating the loan and collateral sides of the trade. For these reasons, main index equities in particular have become more widely accepted.
How has the securities lending industry handled the negative press that it has received?
Securities lending has faced its own particular challenges. It’s to its credit that the various trade associations that represent the industry have worked collaboratively and proactively, and continue to do so, to address those issues, to engage the media, and most importantly, to raise awareness with, and educate, beneficial owners
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