SLT: Tell me about the founding of CASLA last year, and your role in it.
Chiuch: To be absolutely precise, though CASLA was founded officially last year, it had been operating on an ad hoc basis for years. The key agent lenders in Canada (CIBC Mellon, RBC Dexia, State Street and Northern Trust) recognised years ago that there were items of common interest that we should probably be collaborating on for the benefit of industry participants.
You could count amongst our earliest achievements the successful lobbying for the prescribed market rules in Canada, and also for a revised treatment of withholding tax on cross border rebates. As the scope and breadth of our priorities grew, we determined that it was time to officially organise, and so it was more of a natural next step. Canada needed a voice and so we took that next step.
We spoke to Data Explorers and determined that between the four largest agent lenders in Canada we had over 95 per cent of the agent lending market in Canada. We decided that was sufficient to move forward as an ad hoc group before forming the association officially. When we formally organised, we held an election, and then I was appointed president. The other founding members are from RBC Dexia, Northern Trust and State Street. Christopher Steeves, formerly of Fraser Milner Casgrain, now at Fasken Martineau DuMoulin LLP and current CASLA secretary, kindly donated his legal services.
SLT: What is the association's role and what have you been doing since you formed?
Chiuch: A key part of our mandate is to help educate stakeholders on the business of securities lending, and the merits of it. We also aim to align goals and keep everybody rolling in the same direction, which includes practitioners, policy makers and regulators. Over time, I think that is going to be of increasing importance. In summation, you could say that we advocate on behalf of the industry and those involved.
Upon officially founding CASLA, we recognised that we needed to reach a broader audience, because the notion of educating practitioners within the industry is limited (because practitioners are directly participating in the industry and have a strong understanding of the practice). So, when we launched CASLA officially we began a deliberate strategy to increase the scope of participation within the association, and we did that by inviting indirect market representation. For instance, we have legal, tax, and hedge fund experts as members of the association in an executive capacity.
SLT: What effect did the global downturn have on the industry in Canada, and what involvement did CASLA have in dealing with that?
Chiuch: Canada obviously didn't feel the same kind of pain as other jurisdictions did, largely due to the fact that we weren't playing in the same space. Roughly 25 per cent of the collateralised securities lending business in Canada was cash, and it wasn't hugely leveraged, so we didn't experience the same kind of reinvestment risk, nor the impact of that on the market that other jurisdictions did.
Looking ahead, certainly I think there's a bigger focus on risk adjusted returns, as well as collateral types and their relative concentration limits in a portfolio. I think operating costs and complexity are definitely rising. It's a common theme with a lot of the change that's going on. Certainly headline risk and reputation risk is on everyone's radar, and relationship management has arguably never been more important: knowing your counterpart and understanding their business. So I think it's fair to say that the key to all this is understanding all the intended and unintended consequences of everything that's happening around you, distilling some of those complexities educating your stakeholders and having meaningful dialogue around them.
SLT: What kinds of links do you have with other international associations, and what kinds of assistance do you give and receive from others in your position around the world?
Chiuch: Many of the individuals who work with various other international associations are industry practitioners and often clients. So, not only are we collaborating at the association level but we're also doing business together every day.
We're very much in tune with each other's issues, which paves the way for a good working relationship with the associations.
CASLA reached out as an ad hoc to the other associations for help and advice in forming an official association, so that we could perhaps avoid some of the challenges that they experienced early in their formation. And they were all very willing and supportive in sharing information and helping us moving that along.
Currently, we have great dialogue and relationships with them. I guess the one differentiator is that each jurisdiction has elements that are specific to it, and that's why cooperation is so important: to understand the differences between jurisdictions, and react to each other.
SLT: Is there a need or a desire for greater regulatory harmony across jurisdictions, and is it likely?
Chiuch: Well, regulatory harmony is something that's obviously favourable, but difficult because of the differences between jurisdictions. In many cases, those differences are justified due to the local market norms, so I think the view that you need to consider when you're looking at harmonised regulations is that it's based on informed decision making. That people really take the time to understand all the possibilities and what the potential unintended consequences are, and make sure proactive steps are being taken rather than knee-jerk reactions that might harm the industry as a whole. People tend to forget that securities lending is not a product in and of itself. Securities lending is a business that supports other capital markets activity. There's been all kinds of research to suggest that without securities lending, or equity finance, or fixed income finance-type businesses, there would be incremental constraints imposed on the industry to the detriment of the market place. So, to the extent that you're moving forward in a productive and informed way, harmonisation is good, but you always have to consider the unintended consequences of knee jerk responses.
SLT: What does the future hold for Canada, and what would you like to see change, if anything?
Chiuch: If I had to prognosticate, I'd say that the velocity of change in our industry is going to have a lasting effect on our business. The breadth of complexity that's raining down on capital markets could be generational in nature, especially when you consider the changes that are coming down from other jurisdictions like Fin Reg or the tax changes coming down in the US. So, the cost and complexity of doing business is going to rise, and larger financial institutions will certainly have better resources available to deal with the uncertainty.
That said, the securities finance industry in most cases seems to be on the rebound, I think progress is tempered by the uncertainty in the coming regulatory environment. People are waiting to see what the future will bring, but the current trend is clearly upward, and that's a good thing.
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