Caceis has engaged in an ambitious programme of expansion in recent years, reflecting a drive to complement organic growth with the continued expansion of its international coverage through acquisition. Senior management at the Paris and Luxembourg-based bank is emphatic that further consolidation is likely in the asset servicing sector and that Caceis aims to be a primary driver of that consolidation in Europe and beyond.
While these ambitions extend across its asset servicing franchise, this growth creates opportunities for Caceis’ securities finance division through the potential extension of its securities lending, funding and financing presence into new locations globally and the significant widening of its pool of asset owners and borrower counterparties.
With sharp changes in the macroeconomic environment post-Covid, securities finance clients are asking Caceis to help them to transition away from an extended period of low interest rates and abundant liquidity, while negotiating an ongoing stream of regulatory deadlines and the need to deliver technical and digital upgrades to their businesses.
In a recent interview with SFT’s sister publication, Asset Servicing Times, Caceis’ deputy CEO Joe Saliba highlighted that the goal through this acquisition strategy is to bring organisations together to become stronger, combining the bank’s expertise with other entities to create a new Caceis that will be better positioned to define the future.
This is not just a feature of the bank’s recent history, illustrated by the purchases of RBC I&TS, Kas Bank and Santander Securities Services. Prior to that, Caceis engaged in a series of purchases that strengthened its positioning for future expansion. This includes the 2007 acquisition of HVB Germany’s custody business from Unicredit and, in 2010, it bought the fund depository and custody business of HSBC France.
Market dynamics
Against this background, it continues to be a buoyant period for securities lending. Rouigueb describes how, after an exceptional 12 months for securities lending during 2022, there was some anxiety within the industry that 2023 would fail to reproduce this rich pipeline of revenue generation. But 2023 has confounded the pessimists and has been another fruitful year for securities lenders.
According to S&P Global Market Intelligence, the first half of 2023 recorded the second-highest six-monthly securities lending revenues to date, raising US$7.02 billion, US$5.39 billion of which came from equities lending.
US equities lending has been an important contributor to these overall revenue numbers, generating an impressive US$2.59 billion which represents 48 per cent of global equity revenues for H1 2023. US equity specials made a major contribution to this six-monthly figure, accounting — at US$2.05 billion — for 79 per cent of equities lending revenue generated over the period. This represents a 44 per cent rise on the US$1.40 billion generated in H1 2022.
For fixed income lending, 2022 was also a good year for corporate bonds, with global lending revenues rising 11 per cent YoY to US$279 million. Higher average fees have continued to support growth in corporate bond lending revenues, despite a 2 per cent YoY contraction in loan balances during H1 2023 and a 3 per cent drop in utilisation.
“Although there was a temporary slide in US specials revenue for one or two months over the summer, specials bounced back as we moved into the third quarter and, over the 12 months, this has been another hugely successful year for securities lenders,” explains Rouigueb.
Monetary tightening
The European monetary policy environment has entered a phase of transition since mid-2022, moving from an extended period of low interest rates and abundant liquidity, fuelled by central bank liquidity support, to a post-Covid environment of accelerating inflation, rising interest rates and the expectation that central banks will step up the unwind of their asset purchase programmes.
Against this earlier background of low interest rates, securities borrowers that were long cash demonstrated strong appetite to deploy cash as collateral in their securities lending transactions and against other collateralised exposures.
However, a comprehensive revision of the ECB’s Targeted Longer-Term Refinancing Operations (TLTROs) in October 2022 resulted in repayments of around €300 billion in November and around €450 billion in December 2022, which reduced liquidity in circulation in the Eurozone. By mid-2023, approximately half of the aggregate €2 trillion in funds loaned to European banks under the TLTRO III programme had been repaid, with the remaining TLTRO III operations due to mature at the end of 2024.
With the central banks raising interest rates since mid-2022, and with some firms repaying initial tranches of their TLTRO financing, this has reduced excess liquidity and presented more favourable cash investment options for firms that are long cash. This has led to an expected reduction in securities borrowers wanting to push cash as collateral, she notes, with many now preferring to post non-cash wherever they can. However, it has not contributed to a strong uptick in activity through agent bank cash reinvestment programmes. Among other options, new cash lenders have been attracted to secured financing markets as deposit rates paid through government-backed deposit schemes have declined significantly.
Capital cost
For bank counterparties, capital cost efficiency remains a primary consideration in defining their securities borrowing and financing activities and these costs are expected to increase substantially under the Basel III Endgame and Basel IV regimes.
As the International Securities Lending Association (ISLA) has noted in its October 2023 paper, Prudential Banking Rules: Basel III Endgame and the Buy-side, the core purpose of the Basel framework is to protect the resilience of banks and banking systems. The Basel framework is not a binding regulation, but it offers a common approach and a minimum standard to determine the amount of capital that banks must hold when balanced against the risks that they are exposed to in their banking activities.
“This is a conversation that needs to happen between sell-side firms and their buy-side counterparts, delivering a deeper understanding across the asset owner and asset management communities regarding how their lending strategies may affect capital costs on the sell side of the trade,” says Rouigueb.
“Confronted by these balance sheet constraints, there is no question that sell-side firms will need to adapt,” she continues. “This will require active engagement from lending counterparties and the loan intermediaries that they do business with.”
One potential option will be an extension of pledge arrangements in collateralising SFTs. The use of the Global Master Securities Lending Agreement (GMSLA) 2018 Security Interest (‘Pledge’) allows borrowers of securities to transfer collateral to lenders by way of security interest rather than a transfer of title.
This GMSLA Pledge potentially enables borrowers to benefit from better regulatory capital treatment since the borrower retains a property interest in the collateral assets and is not exposed to the same level of risk that excess collateral is not returned by the lender.
However, use of pledge collateral arrangements may only be available to certain counterparties, given that some buy-side firms — for example UCITS and other regulated funds — are restricted in their ability to accept pledged collateral. For example, ESMA Guidelines on ETFs and other UCITS issues, published in 2012, apply a longstanding rule that UCITS may not sell, pledge or re-invest non-cash collateral and these guidelines also limit the degree to which these firms may reinvest cash collateral.
A second option is greater use of central counterparty clearing for SFT transactions. Central clearing has been well established for repo transactions for many years, but CCP launches to support securities-based lending (SBL) activity have previously struggled to build volume. This will potentially change with the amendments to the Basel capital rules, with more sell-side firms interested to manage lending through a central counterparty and with a growing number of global clearing houses (including Eurex Clearing and OCC, with Cboe Clear Europe scheduled to launch a solution during 2024) now offering, or planning to offer, a SBL clearing solution. “As an agent lender, we will support securities lending and borrowing activity on either a cleared or uncleared basis, but our clients need to have a benefit from it,” says Rouigueb.
Given the parallel implications for lending intermediaries, agent lenders are also reconsidering whether, and how, they will offer trade indemnification in times ahead.
Cost of providing indemnification has been estimated to be close to 13bps under the current Basel regime, but this cost is likely to escalate when the Basel III Endgame and Basel IV rules take effect (see, for example, the paper by Mark Faulkner, Something Better Change: Securities Lending Indemnification is Unsustainable in its Current Form, Credit Benchmark, June 2022 and the July 2022 interview with Faulkner in SFT). All leading agent lenders currently provide loan indemnification and few lenders are likely to rush to lend without indemnification in the near term, given that indemnification has been freely available.
This may change, however, as lender and borrower engage in a considered discussion about the associated risk and costs of securities lending. Under the new Basel Rules, banks will be forced to evaluate the aggregate cost of trading in more detail and some lender clients may be willing to reconsider whether they will operate without indemnification, in a well managed risk framework, providing they are incentivised to do so through a share of the cost savings or other benefits. “Among other consequences, this may prompt lending agents and their lender clients to look more carefully at their profit splits,” says Rouigueb.
International expansion
In line with the bank’s aspirations for its wider asset servicing business, Caceis has been working in its securities finance division to expand its international coverage and to deepen its global pool of lenders and borrowers.
“On the client side, we continue to strengthen the client experience, providing new features through the Caceis’ Olis dashboard to improve client insights, analytics and ease of use in the programme,” explains Rouigueb. “This forms part of wider plans to digitise and enhance the client experience for SFT business and across the asset servicing division.”
Caceis’ business growth, since its formation in 2005, reflects an ambitious strategy of organic expansion and acquisition. The firm is now providing custody for more than €4.6 trillion in client assets and close to €3.3 trillion in assets under administration, currently offering services in 17 countries globally.
In July, Caceis completed the acquisition of RBC Investor Services’ operations in Europe and Malaysia. In 2019, it finalised the purchase of Dutch custodian and pension services specialist Kas Bank, thereby taking on Kas’ book of business in the Netherlands, Germany and the UK and a strong pool of institutional asset owners using this service. The bank indicates that it is now being included in RFPs in the UK and in many other European markets, including Germany, Switzerland, Italy and Spain, thereby also deepening the pool of beneficial owners active in the bank’s lending programme.
Prior to that, in 2019, Caceis reached an agreement to combine its custody and asset servicing operations with Santander’s post-trade arm, Santander Securities Services (S3). This resulted in the transfer of 100 per cent of S3 Spain and 50 per cent (minus 1 share) of S3’s operations in Latin America to Caceis, with the transaction extending Caceis’ service coverage in Spain and into Latin America, with operations in Brazil, Columbia and Mexico.
Importantly, the RBC purchase provides valuable technical and operational resources to support Caceis’ future expansion strategy. With the purchase, Caceis has acquired an operations service centre in Kuala Lumpur with more than 1200 staff.
“More generally, we will conduct a thorough review of each of our models, agency and principal lending, to ensure that these are as efficient as possible,” comments Rouigueb.
“We have a sophisticated internal tool that we developed in-house, enabling Caceis to monitor performance, risk and cost across the SFT transaction value chain, including the aggregated capital cost of trading.” The securities finance division has also invested heavily to automate trade flows across the SFT lifecycle and to improve the efficiency of collateral mobilisation and transfers.
This will also support the drive for sustainable investment, and sustainable lending and borrowing, across the division’s client base. Caceis has been green well before green values started to receive their recent prominence, deputy CEO Joe Saliba recently told Asset Servicing Times. This is characterised by Caceis’ ESG-Climate Reporting solution, for example, which is designed to help institutional investors and asset management companies to evaluate their portfolios according to ESG-Climate criteria and to provide transparent information on the social and environmental impact of their investment activity.
While sustainable lending and borrowing is still a work in progress — particularly when it comes to applying ESG screening to collateral eligibility schedules, for example — the industry has moved a long way in ensuring that asset owners can fulfil their shareholder responsibilities through voting their stock on key resolutions at AGMs and EGMs. In meeting this demand, Caceis has effective provisions in place to recall shares prior to record date, thereby ensuring that shareholders can exercise their voting entitlement.
Caceis has long had a diversified client base across the bank, and the securities finance division, embracing pension and insurance funds, sovereign wealth funds, central banks and corporates. The securities finance area has traditionally been strong in France, Luxembourg and in the French-speaking countries. With the acquisition of the European business of RBC I&TS, this has strengthened its coverage across a predominantly English-speaking client base in the UK, Ireland and North America. The purchase of S3 has also extended Caceis’ presence in Central and South America.
The asset servicing product offer is now wider than it has been previously and this is feeding additional business into the securities lending and financing franchise. Caceis now has a complete asset servicing offer front to back, with a more sophisticated offer for servicing alternative assets, pension funds, custody for digital and traditional assets, and a range of other segments. This is supported by product centres of excellence in France, Luxembourg, Germany, Malaysia, Hong Kong and Madrid.
“This is integral to extending the bank’s footprint and reputation as a specialist provider of agency and principal lending services,” concludes Rouigueb. With a securities finance trading desk based in Luxembourg, Caceis offers a sales presence in Paris, London and an expanding number of European and global financial centres, extending into the Asia Pacific and the Americas. “The goal is to reinforce our presence as a leading international player and to continue our expansion as an asset servicing leader in Europe,” she concludes.
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Image: Donia Rouigueb 
