RBC Investor & Treasury Services
Don D’Eramo
22 January 2019
Don D’Eramo, global head of securities lending at RBC Investor & Treasury Services, discusses market trends and the top opportunities for beneficial owners this year
Image: Shutterstock
What trends are you currently seeing in the securities lending space from a North American perspective?
In North America, we continue to see shifts in the behaviour of borrowers towards increased demand for automation, a continued emphasis on balance sheet optimisation and collateral management as well as an overall shift towards further
non-cash collateral.
Levels of automation continue to increase as both borrowers and agent lenders look to streamline flows. There have been ongoing efforts to utilise the latest auto-borrowing technology to actively manage inventory to borrowers thereby minimising the back and forth communication on both sides.
At RBC I&TS, over 75 percent of our connectivity with counterparts is automated allowing a greater focus on optimising high-value lending by our global desks. Secondly, the demand to borrow high-quality liquid assets (HQLA) continues to be significant in North America.
Global financial institutions continue to optimise balance sheet requirements as the focus on regulatory driven liquidity coverage remains a significant mandatory necessity in a post-financial crisis environment.
Additionally, collateral optimisation in itself is increasingly important as the cost of financing remains top-of-mind. These two drivers of demand persistently shape the changing demand landscape towards increasing fixed income on loan balances and especially towards term lending trades.
Lastly, a common trend in the North American space this year, which is expected to continue, is an increasing shift to non-cash collateral. Borrowers are constantly looking for lenders to expand their non-cash collateral offerings to include the acceptance of exchange-traded funds (ETFs), American depositary receipts, additional equity indices and non-investment grade corps.
It is imperative that agent lenders engage with beneficial owners and continue the education on collateral flexibility, trends and expansion.
And more specifically, what trends are you seeing in the Canadian market?
The hot topic here in Canada for most of last year was the federal legalisation of cannabis, which went into effect on 17 October. In the Canadian lending market, cannabis names truly dominated the specials space for H1 2018.
However, as greater supply entered the market through share issuances, lending rates began to see the effects of downward pressure stepping into H2. Recently, we have begun to see some renewed interest in directional demand following the legalisation date in October as the market evaluates supply and demand dynamics as well as investor expectations of valuations.
Outside of the specials environment, the market in Canada is gearing up for some exciting changes in 2019 when it comes to the retail sector, as regulatory changes to national instrument guidelines have expanded mutual funds to allow alternative investment strategies within their retail funds. It is still early days but increased demand to borrow is expected as new funds are expected to launch in the new year.
As of 29 June last year, there were circa €950 billion of equity securities on-loan from an available lendable supply of just over €12 trillion. From your perspective, did you experience a strong H2?
From a notional balance perspective, equity balances do remain a significant component of the global lending market, both from a general loan balance and revenue perspective. However, recent downward trends in the market and a general softening of specials made for a more challenging H2 2018.
It is actually now in the fixed income space where we continue to see strong demand driven by high-quality liquid assets (HQLA) and even in the corporate bond sector. Going into H2 2018 the demand for HQLA continues to rise and specifically on a structured term basis presenting greater opportunities for asset optimisation.
This year, what do you think the top opportunities for beneficial owners will be in the next 12 months?
Appetite for HQLA was a significant demand driver last year with the expectation of continued interest this year. Beneficial owners of HQLA (such as Canadian sovereign and provincial assets), who are flexible with their collateral acceptance, stand to benefit the most through structured term lending opportunities—which we continue to see increasing demand for.
The opportunity to capture premium lending fees for the ability to lock in defined periods for lower grade collateral will be one of the top opportunities for lenders this year.
Additionally, the ongoing focus applied to monetary policy on both sides of the border can be a key driver this year. As the interest rate environment continues to change additional rate hikes can often translate to an increased demand for specific issues, but also a general rise in yields can potentially lead to increased demand for HQLA.
With the ongoing change in the demand sentiment within the lending industry, collateral flexibility by beneficial owners should be considered a significant opportunity to further optimise lending performance this year.
A well-known fact is that wider collateral acceptance can lead to greater overall lending performance, especially in an increasingly non-cash collateral market. Such flexibility is key in structured HQLA opportunities and striking the right balance between risk appetite and collateral acceptance is key to optimising any beneficial owner’s lending programme.
What challenges or opportunities will other areas of the industry face?
Upcoming regulatory changes will continue to be a focus for the industry; a major focal point centres around Securities Financing Transactions Regulation (SFTR).
The transaction reporting phase of SFTR presents a challenge for the industry to find a solution for all key stakeholders (beneficial owners, agent lenders, securities borrowers, custodians and so on) as this will touch the basic core infrastructure of the industry
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