Delegates gathered in Toronto to discuss hot topics and trends in the Canadian securities lending industry
Industry participants gathered in Toronto on 7 June for this year’s Canadian Securities Lending Association (CASLA) conference to discuss recent trends in the Canadian securities lending market.
Benjamin Tal, managing director and deputy chief economist at CIBC, kicked off the event after the opening remarks with an economic forecast.
According to Tal, 2017 was a fantastic one for growth, where every economy, except the US, had an exceptional year, with Canada leading the way.
Tal suggested that the economy is currently in a “transition period” and things are “changing at the speed of light”.
He said: “What was normal in the past is not normal in today’s economy. There are a lot of things happening in a short period of time. We are trying to normalise the abnormal.”
However, Tal noted that 2017 was not as good as it could have been. He suggested: “Expansion has been long, but not strong and very muted—something is happening here that is
very different.”
Leading on from Tal, Samuel Pierson, director of securities finance at IHS Markit, also noted the same trend of growth.
According to data from IHS Markit, last year’s lending revenue totalled $9.3 billion, with 77 percent of that coming
from equity.
Pierson explained that 2017 was a challenge, but revenue growth has been building through the quarters with the first quarter of 2018 being the best post-crisis Q1 revenue.
He said: “If the rest of this year repeats the revenue in Q2 to Q4 of 2017, 2018 will have had the best revenues post-crisis.”
Data showed that US revenues were up by 7 percent, while the EU saw a 4 percent increase.
Pierson revealed that Q1 equity revenue of $710 million is a 25 percent improvement compared with Q1 last year. It also saw Tesla return to the top revenue securities on limited supply around record dates.
In terms of Canada, equity demand was down relative to 2015 and 2016. The declining demand was partly a result of energy short coming off in 2016.
Pierson noted: “This year, overall, there has been further ground for short selling, it hasn’t been easy, but there has been a good amount of volatility.”
The key driver of Canada equity returns so far in 2018 has been the Cannabis stocks, which delivered over 30 percent of Q1 revenues.
Canada become the second country in the world to fully legalise cannabis, after the Senate approved legislation on Tuesday 19 June. It is expected that Canadians will be able to buy and consume cannabis legally from September.
He added: “Borrow costs have trended down, despite increasing demand, largely as a result of share issuance.”
Pierson suggested that Canopy Growth could be the new Tesla. He said: “Valuations largely based on status as largest pure-play in a growing industry, with an uncertain timeline for either side to be proven right. Both have significant short positions near all-time highs in price.”
The data also showed this year’s forecast to stand at over $10 billion, if Q2 to Q4 is a repeat of last year. The industry has also seen the best post-crisis Q1 with global lending revenue of $2.6 billion, while global lendable passed $20 trillion in Q1.
Pierson noted that trends towards non-cash collateral has continued, as well as demand for corporate bonds, which are currently at a post-crisis high set in Q4.
Moving onto regulation, the Securities Financing Transaction Regulation (SFTR) was a topic that featured on the Regulatory and Funding Panel.
Panellists included Chris Ranson of Bank of America Merrill Lynch, Charles Lesaux of RBC Capital Markets, Nick Chan of BMO Capital Markets, Glenn Horner of State Street Global Markets, Sumit Sharma of TD Securities, Lesley Charkow of RBC Investor & Treasury Services and Tamela Merriweather of Northern Trust.
Once SFTR is implemented—most likely closer to the end of next year—it is set to provide transparency on the use of securities financing transactions, and will allow identifying risks associated with the collateral and its reuse.
One speaker suggested that while mortgages are being driven into the dark, SFTR is “going to drive securities lending out into the light—at least that’s our intention”.
The speaker explained: “We have come a long way, we started out with the European Market Infrastructure Regulation (EMIR) on derivatives, we then moved to the second Markets in Financial Instruments Directive (MiFID II) in the interest of transparency and now the regulators are finally getting to securities finance regulations.”
Although the regulation is due to come into force mid-to-late 2019, one speaker suggested it could be introduced as a transition phase, similar to EMIR.
The reporting structure of SFTR is similar to EMIR, but there are a lot more fields to report and to match on.
They added: “Some of the big challenges include timing reporting on T+1 because there is data coming from two sides and sometimes the one side, a non-EU counterparty will not be aware of the reporting requirements and will not have a direct obligation to the regulators. Therefore,. it may be difficult to get the data you need in a timely manner.”
There is also the issue of agent lender disclosure, the timing may not reconcile when you have allocated your loans and so you wouldn’t know the lender’s identity in time to report it. For beneficial owners, it seems their identities and their activities will become more transparent than ever before.
On the implementation date, 62 out of the 117 fields need to match, and there are big consequences for not reconciling and not matching.
One could ask whether firms will take a ‘wait and see approach’ to assess what others are doing, or if they are getting stuck
in now.
For those who have already been through the EMIR and MiFID II experience, leveraging current infrastructure might be an option to consider, as well as looking at lessons learned, according to a panellist.
During another panel session, discussion returned to the cannabis market. Echoing Pierson’s comments from earlier on in the day, panellists discussed the growth around the popularity of cannabis and how the market is set to expand further.
The panel featured Tony Venditti of BMO Capital Markets, Greg Taylor of Purpose Investments, Jamie Blundel of Cannabis Growth Opportunity Corporation, Matt Bottomley of Canaccord Genuity and Yury Shmuylovich of National Bank.
One of the panellists explained that with all the research currently available, the cannabis industry will grow to a $12 billion business by 2022 in Canada alone, and that doesn’t include the value-add chain. However, according to a study late last year, the market could reach up to $23 billion.
Of the $12 billion, $10 billion is estimated to be recreational and $2 billion is estimated to be medical.
A speaker said: “You also have to take note of the transition from the black market to legal, I think that will really tell whether we have an oversupply sooner versus later in the marketplace.”
Another panellist suggested that one of the most interesting things in the market is the demand curve.
They said: “There is no new industry, it is already known, it is a pre-existing product—although there will be new product formations—but the actual cannabis plant itself is a raw material.”
The speaker continued: “The $12 billion estimation could be conservative because what it’s doing is taking a look at historical information and taking a look at how many people have smoked a joint and how many people have had an edible and that number is at somewhere around 10 to 12 percent, depending on what data you look at.”
“I think the incremental user in this space will be someone who doesn’t currently have cannabis on their radar.”
According to another panellist, the winners in this space are going to be those with raw material input.
The speaker explained: “There are going to be some big game changers as regulation around cannabis is rolled out.”
The panel suggested that Canada is in a great position for the cannabis market, but, hoped that the Canadian government allows a little more flexibility in how these companies can market their brands when they come to market.
A speaker said: “We don’t want to be in a situation where we are marginalising these brands and then all of a sudden when the US gets their act together they’re going to play a significant role in the sector. We want to make sure that Canada has that head start.”
They continued: “I think there are going to be some changes in the next few months.There is a lot of talk about shorting, but I think shorting will be a really great source of value add in the sector, because once cannabis is legalised in Canada they are going to have to actually do something.”
“A lot of these are concept companies and I think the big risk will be in the Autumn or early next year once it is legal and companies are producing quarterly reports.”
“That’s when you will be able to separate the winners and the losers and that’s when the trading of securities will really get interesting.”
Automation was also a topic for conversation during the conference.The last panel of the day, saw speakers discuss how there is now a lot of automation in the industry and how a lot of things that were once manual are now automated processes. The panel included Claire Van Wyk-Allan of AIMA Canada, Brian Lamb of EquiLend, Cezan Duong of BNY Mellon, Jennifer Ocampo-King of TD Securities, Joseph Puliafico of Societe Generale and Mary Jane Schuessler of RBC Investor & Treasury Services.
One speaker explained that it is hard to keep up pace with the change in the industry. The speaker said: “We work closely with the industry to better service our clients, it is about managing the pace, not just managing the change.”
