spanIs it fairly easy to capture the market, simply due to the fact that not many firms offer securities lending services in Luxembourg?
CACEIS has its dealing room and securities lending desk based in Luxembourg, but the dealing room services are available to clients of the entire CACEIS group. The securities lending market is a global market and the location of a securities lending desk has little bearing on the ability to service clients, other than effects of time zone coverage and the regulatory environment. Luxembourg is able to cover much of US, European and Asian needs in terms of business hours, and the country has an enviable reputation for social and economic stability, a business-friendly government and quick action when it comes to implementing directives into national law.
As CACEIS is a multi-faceted asset servicing provider, active throughout the world, and occupying a position as Europe’s leading custodian, most of our clients join as custody clients and then benefit from our integrated securities lending programme, which often not only offsets custody fees, but also contributes to the ‘net’ fee income, boosting the performance of the fund. In the past, we only offered our securities lending services to our custody clients. However, due to increasing demand, CACEIS has set-up a remote lending offer in order to meet potential external client needs.
One peculiarity of Luxembourg’s regulation is the level of collateralisation that is required to protect securities lending transactions—do you take advantage of this quirk?
Although the Luxembourg regulations stipulate that the minimum is set at 90 percent of the global valuation of the securities lent, CACEIS always collateralises at 105 percent. We are servicing a conservative clientele that is unwilling to take unnecessary risk on its assets and carefully scrutinises counterparty risk, so we make asset security a priority and take measures to limit counterparty risk. This position is unlikely to change in the near future.
Do you think the country will grow in terms of securities lending or is it destined to be an administrative hub forever?
Luxembourg definitely has a specialisation on the administrative side, mainly for mutual funds but also to a growing extent for alternative investment funds. It looks like its future in this respect is fairly stable. The future for securities lending in the country largely depends on where the lender decides to set up its dealing desk. CACEIS decided to locate its securities lending operations in Luxembourg, which is the hub for the group’s international business and serves all of our entities. Luxembourg provides a stable regulatory environment from which to run a lending programme, but with today’s electronic communication tool and IT platforms, the actual location of the desk is less important than the quality of the service, the integration with custody and fund administration, the ability to manage risk, and the overall reputation the lending desk.
Are you seeing increased demand for independent collateral management services?
Currently, there is little demand for independent collateral management services from our clients as we offer a full service package through a one-stop-shop approach, which covers the entire lending process with a clear respect of task segregation and properly defined ‘Chinese walls’. We have also seen very little demand for this from third-party clients.
What do you think of the state of transparency around collateral metrics in Luxembourg? Has it improved over the last couple of years?
It is very difficult to give an objective opinion on collateral metrics as there are no statistics available on the subject. In Luxembourg, lenders currently have no obligation to publish statistics, so we have little idea as to what the clients of competitors are applying as collateral metrics. However, we believe that with the ongoing changes in regulation, this will very likely change in the future as part of the regulators efforts to shed more light on securities lending in general and collateral applications in particular.
What do you think of ESMA’s July guidelines on ETFs and other UCITS issues that could affect securities lending profits?
CACEIS clearly views the European Securities Market Authority’s (ESMA’s) guidelines relating to securities lending profits as a means to improve and to strengthen transparency, but also to gain a better understanding of the value chain—who is taking a share of the revenues and for what reason. For CACEIS, it has has little impact as there is nothing in the guidelines that precludes a securities lending agent (such as a custodian bank or fund manager) from charging a commercial fee for its services. A commercial fee is a cost that the guidelines state can be deducted from the revenue.
The main aim of the guidelines is in fact to allow only active players in the value chain to take a share of the revenue. Services that are provided by a lending agent such as CACEIS include the negotiation of loans, record keeping, corporate action monitoring, income collection and collateral risk management, so providing a justification for a share of the revenue is not hard. What the guidelines aim to achieve is, for example, to prevent a fund sponsor from simply delegating the securities lending operations to a third party and taking an 80 percent share of the revenue without having to do anything. ESMA judges that—in this type of case—the risks are all borne by the investor, but revenue is received by the manager.
However, even for the manager/promoter, this will only have a minimal impact. When appointing a custodian to support their securities lending operations, they may charge an additional fee that is designed to cover the expenses and costs that are associated with the administration and oversight of the lending programme.
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