State Street’s Canadian securities lending specialist speaks to SLT about how the market is developing
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Warren Maynard is vice president of account management & sales for State Street’s Securities Finance division in Canada and is also responsible for collaborating with the trading, legal and product development teams to help create products specifically for Canadian lenders.
In addition, Maynard serves on the board of the Canadian Securities Lending Association (CASLA) as vice president.
SLT: What is State Street’s role in the market?
Warren Maynard: State Street acts as an agent for its lending programme in Canada. We offer our clients the options of both a non-cash collateral program and a cash collateral programme with a customised solution to meet their program goals and risk parameters.
The Canadian market, which is approximately $700 billion as of mid-September according to Data Explorers, continues to be a primarily non-cash lending environment with 90 per cent of the lending negotiated versus securities as collateral. The cash collateral market in Canada is approximately 10 per cent of the current market. Lenders have been doing deeper dives into their lending programmes and customising lending solutions based upon their risk and reward tolerances. Canadian lending clients are generally risk adverse and have been rolling back the risk profiles of their lending programmes over the past couple of years.
The trends that we are seeing in Canada on the non-cash collateral side are an expansion of non-traditional non-cash collateral types like equities as collateral and widely-traded debt instruments. On the cash side, clients are customising investment portfolios towards their own internal risk parameters and looking to participate in segregated cash collateral investment programs to allow this customisation and portability for future market changes. This customisation includes not only the credit parameters around the cash collateral re-investment guidelines but also the weighted- average maturities of the investment portfolios with most being brought in.
The securities lending industry in Canada has been and continues to be dominated by the custodial lenders. There are only a few lenders who lend directly and only a handful of lenders that lend on a third party basis through another provider other than their custodian. This dominating custody lending model is vastly different than the lending models of other regions that have a great deal of more lenders that lend through third party arrangements.
SLT: What is the current state of the market?
Maynard: Today, from the standpoint of beneficial owners and lenders the environment is much better as opposed to the post-crisis period of 2008. Beneficial owners in general have gained a better understanding of their overall programmes and taken action on their programmes, altering aspects so they are better set for the future.
We’re seeing clients that are more engaged and having more regular discussions with our lenders. The theme of customisation is now popular with lenders as they look to tailor their lending programme to their own internal risk parameters. Increasingly, we are having conversations along the lines of, “Is there anything that my counterparties are doing that we should look at?”
SLT: What are the most important macroeconomic factors from your point of view?
Maynard: Interest rates in Canada are low currently but they are higher than interest rates currently in the US. In Canada, this does allow us the flexibility on the cash collateral side to undertake more business to pick up some investment spreads. While recent comments from the central bank have indicated that it was positioning for higher near-term rates, recent commitments by the Fed to keep rates unchanged until 2013 and softer economic data have changed the Bank of Canada’s rhetoric leaning to a more dovish tone in its statements over the short term. Over the longer-term there will likely be higher revenues as the central bank begins a tightening cycle to normalised rates. When we do eventually enter into an increasing rate environment we will experience the same type of challenges we have seen before in managing the short-term duration of the funds around the Bank of Canada reset dates for overnight interest rates.
SLT: In a recent Finadium survey, asset managers noted that they expect increased revenues in securities lending over the next few years due to greater AUM in their programmes and higher interest rates - do you see this as well?
Maynard: We cannot predict when we are going to enter an increasing rate environment as that may take longer than what we initially anticipated at the beginning of 2011. However, we are seeing growth opportunities in the market with lenders coming from expansion into non-traditional type non-cash collateral programmes allowing the borrowers greater opportunities to finance their long inventories as collateral. We also continue to see some growth on the cash collateral side of the business as clients segregate and customise their investment programs.
SLT: What are some of the advantages of and barriers in the Canadian securities lending market?
Maynard: The advantages that the Canadian lending market has enjoyed is that on an industry-wide basis there was not as much impact as other markets experienced during the global crisis. Our regulations in Canada provide lending clients with a wide variation of options available to them in their lending programs and there is less intervention by regulators in terms of restrictions on lending programmes such as short selling rules.
We have increasingly moved into the global forefront with regards to lending markets that Canadian lenders can participate in and we have enjoyed relief of some of the cross-border tax burdens that our market has had in years prior. Canadian lenders have several choices and considerable opportunities for customisation of their programmes.
The barriers in the securities lending market in Canada would, in some cases, be similar to those experienced by other global lenders. Supply continues to grow at a faster rate than demand for loans. The demand side of the business has not grown back to where it was pre-crisis. Another challenge that the industry faces in Canada is that we have a relatively small short-term money market in Canada which limits our cash collateral re-investment options as we look to grow this side of the business. There are also fewer borrowing counterparties in Canada compared to other markets.
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