Switzerland
09 July 2013
Did Swisscanto’s bowing out of securities lending sound a death knell for the sector in Switzerland? SLT investigates
Image: Shutterstock
It was not a good day for the Swiss securities lending sector when Swisscanto announced that it was abandoning the practice.
As a joint venture of the 24 Swiss Cantonal Banks, the large asset manager and fund provider has been offering pension solutions for more than half a century, and it was an important part of the securities lending business in the country.
But this changed with its September 2012 announcement, which cited conflict of interest, investor right restrictions and a lack of transparency as just a few of the reasons for bowing out of securities lending.
Peculiarly, the asset manager then brought out survey results in May, which seemed to show that securities lending is on the wane in Switzerland.
The dramatic events that took place in the capital markets in 2008 led pension institutions to rethink their approaches to lending and borrowing, said the firm, adding: “Many funds are aware that the supposedly risk-free and temporary lending of securities contained dangers hitherto barely considered, such as counterparty risks, for which it may not be possible to compensate due to relatively low earnings.”
One of the results of the survey was a particularly damming graph showing that the majority of pension funds holding less than five billion withdrew from securities lending and borrowing between 2008 and the end of 2012.
The survey also showed that pension funds were acting in a far more cost-effective fashion, apprently being careful to keep expenses under control, and using any opportunities to make cost savings, both in general administration and capital investments.
“In fact, the costs identified and their development in the last few years are quite impressive,” stated Swisscanto.
“Since 2007, the total expenses for capital investments and administration of insured persons have been reduced by the smallest funds with less than 250 beneficiaries by almost 40 percent per head on average, from around 1170 to 720 Swiss francs, whilst the largest funds with over 10,000 beneficiaries have reduced their expenses per head by 20 percent from 430 to 345 Swiss francs, a similarly impressive amount in view of their significantly lower cost base.”
But those still in the industry are less than pleased with the survey. A source familiar with the matter says that he was surprised at both the timing and content of the report.
In terms of the contents, he contends that counterparty risk is not an adequate reason for abandoning securities lending and borrowing.
“The report stated that one of the major reasons for stopping was counterparty risk. Counterparty risk for pension funds is mitigated by adequate collateral, which is also postulated by the regulator. If you effectively collateralise the programmes, why is counterparty risk a problem? If you deal with a very solid well-capitalised bank that is able to monitor various types of concentration limits and restrictions in order to optimally diversify collateral risk … the problem shifts from a counterparty to a collateral risk.”
He concedes that lack of transparency is, however, an issue that the securities lending and borrow industry faces. Swisscanto, in justifying its exit from the business, said that it is not normally apparent to the lender to whom and at what cost a security is loaned. “Nowadays securities are loaned in part via several stages, with corresponding systemic risks in the event of just one failure in the chain.”
But, the source counters, there are efforts to make the whole business more transparent—with a number of tools available to compare performance of programmes relative to certain benchmarks.
The timing, he adds, was also a little off—with a large percentage of clients that abandoned lending post-2008 having returned to the business.
It is certainly true that a reshaping of the securities lending landscape in Switzerland took place long before 2013.
In an interview in May 2012, Oliver Madden of RBC Investor Services (formally RBC Dexia Investor Services) said that, following the credit crisis in 2008, a measured consultation and review took place of the market through 2009—ultimately leading 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,” he said.
“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.”
No saving grace
Swisscanto ultimately decided that, even with FINMA’s guidance, the advantages of securities lending were not worth the disadvantages.
“Obviously it hurts to use a big player in the market like Swisscanto, which was one of the top three fund management companies in Switzerland,” said the source.
“This is giving a certain signal to some of the skeptics in our industry who are using Swisscanto as reason to exit their programmes. But we haven’t seen the kind of exodus that the survey portrays, and we actually hope to grow our asset pool in years to come.”
“All we need is to be creative in the solutions we offer, be transparent, make clients comfortable with the risks and give them the tools that they need to manage that risk.”
As a joint venture of the 24 Swiss Cantonal Banks, the large asset manager and fund provider has been offering pension solutions for more than half a century, and it was an important part of the securities lending business in the country.
But this changed with its September 2012 announcement, which cited conflict of interest, investor right restrictions and a lack of transparency as just a few of the reasons for bowing out of securities lending.
Peculiarly, the asset manager then brought out survey results in May, which seemed to show that securities lending is on the wane in Switzerland.
The dramatic events that took place in the capital markets in 2008 led pension institutions to rethink their approaches to lending and borrowing, said the firm, adding: “Many funds are aware that the supposedly risk-free and temporary lending of securities contained dangers hitherto barely considered, such as counterparty risks, for which it may not be possible to compensate due to relatively low earnings.”
One of the results of the survey was a particularly damming graph showing that the majority of pension funds holding less than five billion withdrew from securities lending and borrowing between 2008 and the end of 2012.
The survey also showed that pension funds were acting in a far more cost-effective fashion, apprently being careful to keep expenses under control, and using any opportunities to make cost savings, both in general administration and capital investments.
“In fact, the costs identified and their development in the last few years are quite impressive,” stated Swisscanto.
“Since 2007, the total expenses for capital investments and administration of insured persons have been reduced by the smallest funds with less than 250 beneficiaries by almost 40 percent per head on average, from around 1170 to 720 Swiss francs, whilst the largest funds with over 10,000 beneficiaries have reduced their expenses per head by 20 percent from 430 to 345 Swiss francs, a similarly impressive amount in view of their significantly lower cost base.”
But those still in the industry are less than pleased with the survey. A source familiar with the matter says that he was surprised at both the timing and content of the report.
In terms of the contents, he contends that counterparty risk is not an adequate reason for abandoning securities lending and borrowing.
“The report stated that one of the major reasons for stopping was counterparty risk. Counterparty risk for pension funds is mitigated by adequate collateral, which is also postulated by the regulator. If you effectively collateralise the programmes, why is counterparty risk a problem? If you deal with a very solid well-capitalised bank that is able to monitor various types of concentration limits and restrictions in order to optimally diversify collateral risk … the problem shifts from a counterparty to a collateral risk.”
He concedes that lack of transparency is, however, an issue that the securities lending and borrow industry faces. Swisscanto, in justifying its exit from the business, said that it is not normally apparent to the lender to whom and at what cost a security is loaned. “Nowadays securities are loaned in part via several stages, with corresponding systemic risks in the event of just one failure in the chain.”
But, the source counters, there are efforts to make the whole business more transparent—with a number of tools available to compare performance of programmes relative to certain benchmarks.
The timing, he adds, was also a little off—with a large percentage of clients that abandoned lending post-2008 having returned to the business.
It is certainly true that a reshaping of the securities lending landscape in Switzerland took place long before 2013.
In an interview in May 2012, Oliver Madden of RBC Investor Services (formally RBC Dexia Investor Services) said that, following the credit crisis in 2008, a measured consultation and review took place of the market through 2009—ultimately leading 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,” he said.
“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.”
No saving grace
Swisscanto ultimately decided that, even with FINMA’s guidance, the advantages of securities lending were not worth the disadvantages.
“Obviously it hurts to use a big player in the market like Swisscanto, which was one of the top three fund management companies in Switzerland,” said the source.
“This is giving a certain signal to some of the skeptics in our industry who are using Swisscanto as reason to exit their programmes. But we haven’t seen the kind of exodus that the survey portrays, and we actually hope to grow our asset pool in years to come.”
“All we need is to be creative in the solutions we offer, be transparent, make clients comfortable with the risks and give them the tools that they need to manage that risk.”
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