The Netherlands
05 March 2013
The Netherlands securities lending market is narrowing to concentrate on its domestic clients, as SLT finds out
Image: Shutterstock
The spice trade was a favourable period in history for citizens of the Netherlands, who revelled in the riches of dealing cinnamon, cassia, and ginger in Indonesia, which they promptly colonised and re-named the Dutch East Indies.
The region has retained close ties with the Netherlands—most recently, the government provided humanitarian assistance to a number disaster-stricken regions—and the Dutch have marked Indonesia out as a growing economic power, with high-level officials visiting the country in a new push to improve bilateral ties.
Trading ties could become more important to the Netherlands’s financial security, as the country’s central bank recently warned that the Dutch economy is in worse condition than originally believed in December last year.
Fears were proven correct as the Dutch economy contracted 0.2 percent in the final quarter of last year, meaning the Netherlands is now back in recession, according to initial estimates from the national statistics office CBS.
Sander Baauw, a managing director of IT solutions and services provider Synechron, says that since the financial crisis, Dutch entrepreneurial spirit has rapidly declined in favour of a more conservative approach.
“Since the 17th century, the Dutch have been known for their creativity and their excellent trading spirit; due to these skills they conquered the world in that era. If you compare this to the banking sector 10 years ago, you still saw that same skill set and with this as a differentiator, the Dutch banks were a strong brand name in the world.”
“Together with the Dutch pension plans, they were large players and always looked for new opportunities and expanding around the world. This was no different for the securities lending market, but nowadays this is totally different due to the crisis. The banks are risk averse and more focused on Dutch clients and don’t feel the need to open offices all around the world anymore to expand their lending activities.”
Bauuw describes the Netherlands as a decent-sized market, with one real custodian lender, one asset manager and three big banks. All five are risk adverse, which is not so different from every other country, he says.
“They all have been active in this market for many years, with a very professional, experienced, and loyal crew working for them. Next to these direct participants, you have the pension funds and insurance companies who have been historically large beneficial owners and who are active via the international agent lenders. On the other side of the market, you have a large market makers and arbitrage community in the Netherlands who are actively creating demand via their clearinghouses and prime brokers.”
Drivers and demand
A natural resource boom could make a nation’s currency stronger than others, resulting in its exports becoming more expensive to buy and its manufacturing sector, somewhat incongruously, less competitive. The phenomenon—known as ‘Dutch disease’—was coined when the Dutch manufacturing sector struggled despite its natural gas boom in 1959.
Currently, the manufacturing sector in the Netherlands is fairly static, with an average daily output just one percent up in December 2012 from the same period a year before.
Outputs of petroleum, chemical, rubber and plastic products increased 5 percent, but output in the electronics and machinery sector declined nearly 8 percent. Production levels in the food, drinks and tobacco sector, as well as the basic metals and metal products sector, were also down, falling more than 2 and nearly 3 percent respectively.
A static output reflected a “combination of a slower fall in new orders and a further reduction of backlogs,” said a Markit Securities Finance report in December, which added that jobs were cut at a weaker rate, while input price inflation eased and output charges were raised at a faster pace.
The firm’s NEVI Netherlands Manufacturing PMI (purchasing managers’ index) features original survey data collected from a representative panel of around 500 companies based in the Dutch manufacturing sector.
The headline NEVI Purchasing Managers’ Index—an indicator designed to provide a single-figure snapshot of the performance of the manufacturing economy—registered 49.6, up from 48.2 in November 2012. That was its highest reading in three months, although remained below the crucial 50.0 threshold to signal a further slight deterioration in overall operating conditions.
Stable overall production at Dutch manufacturers masked divergences at the sub-sector level, with higher output in the consumer and investment goods categories offsetting a marked drop in intermediate goods production. New orders placed with manufacturers in the Netherlands fell for the third month running in December.
The rate of contraction was unchanged from the moderate pace recorded in November, and respondees to Markit’s survey said that reduced new order intakes had allowed them to dedicate resources to the clearance of existing workloads.
Input price inflation in the Dutch manufacturing sector eased in the latest survey period, although remained solid, and a range of raw materials were reported to have increased in cost since the previous month.
Jack Kennedy, senior economist at Markit, commented: “The Dutch manufacturing sector broadly stabilised in December, with output unchanged following a dip in November. Data suggested that higher export sales continued to offset weakness in domestic demand, albeit the disparity was less marked than in the previous survey period. A slower drop in employment also provides some encouragement that the sector is entering 2013 on a more stable footing, although the wider outlook clearly remains challenging.”
Shaking up the changes
Looking at the laws and regulations in relation to securities finance in the Netherlands, there is not much different from most other West European countries, says Bauuw. “Every country has slightly different laws and regulations, but at the end the intention will be the same and the differences will be in the detail.”
NASDAQ OMX Derivatives Markets shook up its list of eligible collateral in December, announcing that further changes will be made in connection to the implementation of its collateral management solution in March 2013.
Though government bills and fixed rate, unstructured and dated government bonds issued by the Netherlands remained in the ‘yes’ pile, Bauuw remarks that both lenders and beneficial owners are becoming more specific about which collateral is acceptable.
“The lenders did a great job the last five years to educate their beneficial owners about the risks of collateral and collateral reinvestment programmes, so they are more aware and their collateral eligibility matrix is stricter. The risk is actually not only in the acceptability, the liquidity and the concentration of the collateral; the danger is sometimes more in the lack of decent collateral processes.”
The amount of manual work that is still in place remains a problem, with Bauuw commenting that an important example is the lack of procedures and workflows in case of a counterparty default.
“We have experienced a few counterparty defaults in the last couple of years, but if you ask people if they have a script in place what to do in case it happens, you will find out this will not always be there. Many trading desks will always answer this question with a full ‘yes’ if you ask them or they will say they don’t need it because they have enough experience at the desk and they never suffered any losses on it in the past. They don’t realise that these experienced staff may go on holiday, or break a leg. If I was a beneficial owner or a risk department, I would always want to see the full procedure on paper.” SLT
The region has retained close ties with the Netherlands—most recently, the government provided humanitarian assistance to a number disaster-stricken regions—and the Dutch have marked Indonesia out as a growing economic power, with high-level officials visiting the country in a new push to improve bilateral ties.
Trading ties could become more important to the Netherlands’s financial security, as the country’s central bank recently warned that the Dutch economy is in worse condition than originally believed in December last year.
Fears were proven correct as the Dutch economy contracted 0.2 percent in the final quarter of last year, meaning the Netherlands is now back in recession, according to initial estimates from the national statistics office CBS.
Sander Baauw, a managing director of IT solutions and services provider Synechron, says that since the financial crisis, Dutch entrepreneurial spirit has rapidly declined in favour of a more conservative approach.
“Since the 17th century, the Dutch have been known for their creativity and their excellent trading spirit; due to these skills they conquered the world in that era. If you compare this to the banking sector 10 years ago, you still saw that same skill set and with this as a differentiator, the Dutch banks were a strong brand name in the world.”
“Together with the Dutch pension plans, they were large players and always looked for new opportunities and expanding around the world. This was no different for the securities lending market, but nowadays this is totally different due to the crisis. The banks are risk averse and more focused on Dutch clients and don’t feel the need to open offices all around the world anymore to expand their lending activities.”
Bauuw describes the Netherlands as a decent-sized market, with one real custodian lender, one asset manager and three big banks. All five are risk adverse, which is not so different from every other country, he says.
“They all have been active in this market for many years, with a very professional, experienced, and loyal crew working for them. Next to these direct participants, you have the pension funds and insurance companies who have been historically large beneficial owners and who are active via the international agent lenders. On the other side of the market, you have a large market makers and arbitrage community in the Netherlands who are actively creating demand via their clearinghouses and prime brokers.”
Drivers and demand
A natural resource boom could make a nation’s currency stronger than others, resulting in its exports becoming more expensive to buy and its manufacturing sector, somewhat incongruously, less competitive. The phenomenon—known as ‘Dutch disease’—was coined when the Dutch manufacturing sector struggled despite its natural gas boom in 1959.
Currently, the manufacturing sector in the Netherlands is fairly static, with an average daily output just one percent up in December 2012 from the same period a year before.
Outputs of petroleum, chemical, rubber and plastic products increased 5 percent, but output in the electronics and machinery sector declined nearly 8 percent. Production levels in the food, drinks and tobacco sector, as well as the basic metals and metal products sector, were also down, falling more than 2 and nearly 3 percent respectively.
A static output reflected a “combination of a slower fall in new orders and a further reduction of backlogs,” said a Markit Securities Finance report in December, which added that jobs were cut at a weaker rate, while input price inflation eased and output charges were raised at a faster pace.
The firm’s NEVI Netherlands Manufacturing PMI (purchasing managers’ index) features original survey data collected from a representative panel of around 500 companies based in the Dutch manufacturing sector.
The headline NEVI Purchasing Managers’ Index—an indicator designed to provide a single-figure snapshot of the performance of the manufacturing economy—registered 49.6, up from 48.2 in November 2012. That was its highest reading in three months, although remained below the crucial 50.0 threshold to signal a further slight deterioration in overall operating conditions.
Stable overall production at Dutch manufacturers masked divergences at the sub-sector level, with higher output in the consumer and investment goods categories offsetting a marked drop in intermediate goods production. New orders placed with manufacturers in the Netherlands fell for the third month running in December.
The rate of contraction was unchanged from the moderate pace recorded in November, and respondees to Markit’s survey said that reduced new order intakes had allowed them to dedicate resources to the clearance of existing workloads.
Input price inflation in the Dutch manufacturing sector eased in the latest survey period, although remained solid, and a range of raw materials were reported to have increased in cost since the previous month.
Jack Kennedy, senior economist at Markit, commented: “The Dutch manufacturing sector broadly stabilised in December, with output unchanged following a dip in November. Data suggested that higher export sales continued to offset weakness in domestic demand, albeit the disparity was less marked than in the previous survey period. A slower drop in employment also provides some encouragement that the sector is entering 2013 on a more stable footing, although the wider outlook clearly remains challenging.”
Shaking up the changes
Looking at the laws and regulations in relation to securities finance in the Netherlands, there is not much different from most other West European countries, says Bauuw. “Every country has slightly different laws and regulations, but at the end the intention will be the same and the differences will be in the detail.”
NASDAQ OMX Derivatives Markets shook up its list of eligible collateral in December, announcing that further changes will be made in connection to the implementation of its collateral management solution in March 2013.
Though government bills and fixed rate, unstructured and dated government bonds issued by the Netherlands remained in the ‘yes’ pile, Bauuw remarks that both lenders and beneficial owners are becoming more specific about which collateral is acceptable.
“The lenders did a great job the last five years to educate their beneficial owners about the risks of collateral and collateral reinvestment programmes, so they are more aware and their collateral eligibility matrix is stricter. The risk is actually not only in the acceptability, the liquidity and the concentration of the collateral; the danger is sometimes more in the lack of decent collateral processes.”
The amount of manual work that is still in place remains a problem, with Bauuw commenting that an important example is the lack of procedures and workflows in case of a counterparty default.
“We have experienced a few counterparty defaults in the last couple of years, but if you ask people if they have a script in place what to do in case it happens, you will find out this will not always be there. Many trading desks will always answer this question with a full ‘yes’ if you ask them or they will say they don’t need it because they have enough experience at the desk and they never suffered any losses on it in the past. They don’t realise that these experienced staff may go on holiday, or break a leg. If I was a beneficial owner or a risk department, I would always want to see the full procedure on paper.” SLT
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