Can you outline PGGM’s securities lending strategy?
Most of our clients operate under the rule that their securities can be lent unless otherwise specified. We have a proven track record for responsible investment and so our clients trust us to lend and manage their securities on their behalf.
To our clients that don’t feel securities lending fits with their strategy, I would still always advise that they turn that option on for their portfolio because securities can always be recalled and the tool can be switched off again. It’s a useful tool for many reasons, such as liquidity.
With regard to collateral, adding risk to our programme is not something I’m interested in doing, so I will only accept the highest possible collateral, meaning government bonds from the major countries.
We accept bonds for equity lends but we don’t lend our own bond portfolio, which I think pleases the regulator. We stopped lending our bonds after the Lehman Brothers collapse. We learnt the lesson—we felt we were giving up liquidity without being sufficiently rewarded for it.
We would take other forms of collateral, such as equity, as long as it doesn’t affect our risk profile as a whole. Equity could work as collateral when lending equities, because the correlation is good.
However, we don’t accept equity at the moment because triparty collateral agents don’t yet have the right tools to do it properly. For example, they use yesterday’s price for equities, which is ludicrous. I understand the general logic, but I don’t think the right instruments are in place at the moment.
There are a lot of regulations in the pipeline at the moment. Is there any specific one that you find particularly troubling?
The International Swaps & Derivatives Association’s ‘stay protocol’, which requires an extra two-day waiting period before declaring insolvency, worries me because it’s very difficult to predict how the regulator is going to apply it. It is always scary when there are no firm rules and a lot of discretionary powers. I don’t think it will make the world a safer place.
Do you expect your lending strategy will have to change as a result of any of the regulations?
I don’t think so. At the moment we are investing a lot of money in improving our collateral management capabilities with a collateral dashboard. This will allow us to chart our risks more efficiently across all our products.
Up until the Lehman collapse, unsecured was the default for deposits with banks, but now everything is collateralised, so you have to become smarter with it. That means pricing, managing and aggregating better.
It has been suggested that the wide disparity between supply and demand in securities lending has put pressure on beneficial owners to accept a wider variety of collateral. Are you feeling this pressure?
At the moment we’re sticking to our current strategy. We only deal in high-value, intrinsic trades so the cost of collateral is less of an issue. At the same time, although I do understand the case for accepting equity as collateral, we can only consider taking it onboard if it can be done in a safe way. We refuse to take on more risk.
Does the central counterparty model interest you as a way to mitigate the risk of equity as collateral?
I’m not a big fan of any form of mandatory central counterparty (CCP), to be honest. I struggle to see the advantages of it as a product.
The CCP, in my opinion, is just another mouth to feed in the chain, and the pie isn’t getting any bigger.
If the model was changed so that it didn’t operate through your lending agent, or at least at a lesser fee, then we could look at it, but I’m not happy to be forced to use something. If you make a product I like, I’ll buy it.
There has been a suggestion that the reason it hasn’t been taken up more by beneficial owners is because we don’t understand the product. That’s nonsense—we just don’t like it.
What’s worse is that because there is talk of making CCPs mandatory they think they will have a monopoly soon and can just play the waiting game.
What aspects of the proposed CCP model for securities lending would you like to change?
The main aspect is the cost. If mandatory clearing was introduced on all our products, there has been a prediction that the cost to pensioners, our ultimate clients, would be a 3 percent decrease in their pension.
Regarding the risk mitigation argument, I believe we have a very robust risk model ourselves already. A CCP centralises risk but I don’t think it makes things any safer than the current situation.
I do see an advantage to having CCPs as an option within the securities lending industry, but with regard to costs, it’s not clear who should give up their part of the pie.
Do you think less ambiguous regulation will see an up-tick in borrowing demand from those that were hesitant to invest before?
On the macro scale, regulators would like less leverage in the market and a safer world, which wouldn’t be consistent with more demand. When the wider economy picks up I’m sure there will be more utilisation, but regulators will continue to squeeze leverage out.
I think demand will remain stable for the near future.
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