How attractive are markets proving to your clients at the moment?
Markets have improved across the board. Asian markets remains buoyant and emerging markets demand remains solid in Asia for Taiwan and many other frontier markets such as India, Indonesia and China. In Latin America, Brazil also remains a very attractive market but its lending infrastructure poses challenges. Although emerging markets are often the space where clients can earn better returns than expected, the traditional markets, such as the US, have enjoyed nice upward trends in the last few years with increased specials activity.
From a demand perspective, the business has changed. Although supply rebounded to pre-crisis levels, demand remains subdued from 2008 levels to the current market environment. As such, technological efficiencies such as EquiLend/BondLend capabilities remain an essential component to servicing borrower demand and managing a complex book of business in this environment. Reducing leverage and increasing transparency is good and we continue to have a very robust business to support our clients and organisation globally.
I think where there needs to be differentiation is on how securities are lent. Beneficial owners need to be flexible with collateral and agent lenders need to have sufficiently diversified borrower networks. These are a couple of key differentiators that will make securities lending more attractive in the market and allow it to attract more lenders to the programme. Our mantra has always been to have a world-class programme, to think ahead and be able to act quickly, be it to develop the product or make changes as a result of client requirements, the market or regulatory environment.
How flexible is Northern Trust? Do clients require an individual service?
Firstly, it’s important to remember that our client base is broad and deep. It cuts across sovereign wealth funds, government entities, central banks, pension funds, insurance companies, mutual funds, wealth management clients and asset managers. In the US, it also includes large corporates. With such a broad client base, flexibility and the ability to react quickly and provide solutions is key to customer service and satisfaction.
Individual clients have individual needs. They all have different risk and return requirements and the way we have boosted our risk management capabilities and our ability to model different collateral types against the underlying loan has been outstanding. Maintaining the conservative nature of our organisation, we have become more comfortable with collateral flexibility than we were in the past, which also allows us to meet the demands of borrowers. If a client has a profile that accepts cross-currency equity collateral, for example, we can do that. If a client wants to move to collateral transformation or liquidity swap-type trades, where they will accept lower grade collateral, then we can certainly provide that too.
It has been a very robust and lengthy programme of collateral flexibility that we have embarked on over several years.
How is your third party platform going?
We invested heavily in building an excellent third-party platform many years ago and it is really paying dividends now. Frankly, in the past it has not been used as much as we would have liked mainly because of clients appetite to move securities lending away from their custodian. But now it is really coming into play and we have won several large third-party mandates in recent times, mainly due to the strategic aspects of clients around the specific portfolios on which we have been awarded to lend securities.
The more you can demonstrate that you can be in that space, and demonstrate that you have the technology and the support to be able to handle that business, then there is no reason why that will not grow. Our securities lending programme is agnostic to who the custodian is and we pride ourselves on being market leaders in securities lending as well as asset servicing for clients.
What is 2015 looking like for Northern Trust?
The business will continue to evolve. Next year will be a big year with the changing regulatory environment, and it is important to get this right, for us and for our clients. We have been actively monitoring the cumulative impact of global regulatory developments, and we continue to engage with regulators, federal agencies on these regulations either directly or through industry groups.
Borrower expansion in our programme will remain important because it helps to diversify risk and expands our opportunities to lend. This is another project that we have focused on and have added several new borrowers to our programme in recent years. And, as mentioned above, expansion in the types of acceptable collateral remains a priority. Collateral flexibility is important so that we can match requirements on the demand side, which will help to increase our clients’ revenues.
New markets to lend securities in will also be important. We commenced securities lending in Poland earlier this year, and there is a list of markets that we are watching.
Our ultimate aim for 2015 is to grow our clients’ revenues while maintaining our focus on risk, outstanding service, whilst maintaining expertise in this field and operating with integrity, all of which our clients have always enjoyed.
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