SLT: Could you tell us a bit about BMO Capital Markets?
Tony Venditti: BMO Capital Markets is a fully integrated North American investment bank with nearly 2,000 employees around the world, operating in 15 North American offices and 27 worldwide. As of July 31, 2011 BMO Financial Group had US$499 billion total assets. BMO Capital Markets has extensive expertise in providing financial advisory, securitisation, leveraged finance, market risk management, M&A, private placements, institutional brokerage, equity underwriting, treasury services, research and lending.
SLT: How has the integration of Paloma to BMO Capital Markets worked out?
Tony Venditti: It has been almost two years since BMO acquired the securities lending book of business and team from Paloma. The integration of the Paloma business into BMO was a total success! We seamlessly integrated our front end systems, our operational infrastructure, our risk and credit reporting capabilities, and our globalised approach to executing multiple strategies with our very strong counterparty base. There were some minor issues during the first six months, mainly around novating some bespoke agreements and residual positions from Paloma to BMO – particularly as we decided not to novate any securities lending agreements associated with Paloma’s UK broker dealer. BMO was comfortable with our counterparty base and the way we wanted to grow our business; understanding BMO London Ltd’s capitalisation was an important part of the credit evaluations from a counterparty perspective. BMO acted quickly in supplementing additional capital to both the US and UK broker dealers which really helped in obtaining the credit lines we needed to help grow our business quickly. BMO has also been very supportive in providing us an ample amount of balance sheet and liquidity (if we were to need it). The additional benefit of the acquisition is that we have a very strong credit rating and area top ranked financial institution that has an impeccable reputation, as well as numerous global relationships that we can now tap into. I could not have found a better home for the team than BMO and senior management has done an incredible job in supporting our growth as well as being very enthused about our long term prospects for success.
SLT: How has securities lending changed as a result of the market crisis?
Tony Venditti: There has been a noticeable change since the financial crisis. The two concerns that stick out are based around liquidity. Liquidity around funding of assets has been most evident. Now, almost all the large firms are looking for secured term funding in order to get their assets to match up with their liabilities. For years, many firms relied on liquidity from raising cash due to their ability to use short term commercial paper and money markets, and many firms would sit on many illiquid assets which led to some of the problems we had in 2008 when refinancing dried up. The other thing that has changed is how firms are looking much more closely at the liquidity of the securities they borrow/lend/pledge. We have seen haircuts increase and funding spreads increase. That being said, I think this is only the beginning of a gradual increase in cost due to changes in our regulatory environment that will not only affect our industry, but many others - especially when the true cost of long term funding gets passed on directly to the business units. That will find its way to any client that is entering into a trade that uses balance sheet or has some risk associated with it.
SLT: During your time in the industry, how automated has the business become? How much more automated could it get?
Tony Venditti: The equity finance business has changed over the years due to automation but not as quickly as I had expected. I believe many firms have limited resources in which to spend on large IT projects, upgrades, or front end systems, which in some ways holds back our industries overall growth. That being said, there is a big advantage to the larger well capitalised firms that have the resources and the capabilities to use automation to build market share and increase efficiency. I still believe our industry needs to devote a fair amount of time and capital to help automate and build out e-type businesses that help increase order flow and efficiency.
SLT: Has the use of collateral changed in recent years? Does collateral optimisation mean that this part of the business is now considered a profit centre?
Tony Venditti: I would say it hasn’t changed. But what has changed is how people use it. I also think this has always been one of the most overlooked parts of a firm’s strategy (when it is used properly that is), and as I said before, many firms sat on assets that where just a tad harder to fund. There was very little optimisation of collateral until the credit crisis. I now see many firms trying to fund all types of collateral (for fixed term as well). I have always viewed the funding book as a profit centre – this perhaps comes from working for a Japanese firm, with a high cost of capital, for as many years as I did and through multiple market crises. If you have a good team that manages collateral well, you can really increase spreads and help a firm improve liquidity. Since it is not hard to track the benefit, why shouldn’t it be tracked as revenue?
SLT: What are your views now on CCPs? Are there better alternatives?
Tony Venditti: In theory, and in practice, especially during challenging credit times, CCPs are essential. The main issue that I see with CCPs is when we are not in a stressed environment the margin and costs to do business via a CCP could be prohibitive. I have seen how margins can change almost at a drop of a hat and almost make it destructive to deal with them. I think there is a place for CCPs, but depending on the product or market they do not always work. But I am sure that over time they will get the model right.
SLT: Do you have plans for further international expansion?
Tony Venditti: The main areas of growth for our group and BMO CM is equity trading, derivatives, and prime brokerage in the US. We are very strong in these areas. With the infrastructure, counterparties, and talent we brought over from Paloma, coupled with BMO’s strong balance sheet and credit rating, I can see BMO expanding first into Europe and then slowly into Asia. We already have a strong asset management footprint in China and we have been rapidly expanding in that space globally. I also think there are good opportunities in Delta 1 trading globally - mostly revolving around futures and options in which we have had a lot of experience trading. There is also a strong potential in growing more secured finance driven businesses around hedge funds and other investment banks.
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