The sophisticated market
28 May 2019
Industry participants discuss current trends in Canada’s securities lending market as well as opportunities on the horizon over the next 12 months
Image: Shutterstock
What trends are you currently seeing in Canada’s securities lending market?
Alexa Lemstra: It’s good to be a Canadian. According to DataLend, Q1 2019 revenue is up 29.5 percent over Q1 2018, and that growth is driven almost exclusively by cannabis stocks in the health care sector.
Based on their strong home market foundations, the Canadian banks have invested in and developed beyond their Canadian presence, expanding to US and European markets to become truly global players. There is a strong drive of innovation and expansion to provide solutions for their clients and a “get it done” attitude. Strategic investment in collateral management, settlement efficiency and automation are paramount. Solutions for legacy systems still mandate considerable attention as the participants grow and the business expands.
Jarrod Polseno: We are now seeing some of the trends from the US taking hold in the Canadian securities lending market. A broader take-up of technology, as well as expansion in the appetite for a wider variety of collateral types, are primary examples. We are now in a position to price our entire universe of securities and both disseminate our book through next-generation trading (NGT) and consume lists with a bid to help automate flows outside of the general collateral sphere. We see Canadian borrowers beginning to have interest in facing us electronically to a greater extent and to realise the operational benefits of it. We also see increased interest in non-cash collateral—as the prime brokers look to be more efficient with their collateral, they will look to pledge a wider array, which is consistent with their peers around the globe.
Lisa Tomada: Canada is known for having a strong body of very sophisticated market participants, such as our large and mid-size pension asset managers. We are certainly seeing beneficial owners move up the sophistication curve in terms of their strategies as well as their need for advanced reporting to deliver confidence to their underlying stakeholders.
In addition, we’re seeing an ongoing shift to implement an array of technology enhancements. For example, auto-return features and contract compare technologies can enable more efficient processes, as well as help, reduce risks by mitigating the potential for manual processing errors. The benefits also extend to client service, as these new tools help free up our team to focus on client service and more complex activities in support of clients, in turn delivering a stronger service experience for borrowers and owners in our programme.
Dave Sedman: A number of trends emerged over the past year, with one of the major ones being an increase in demand for fixed income securities, specifically high-quality liquid assets (HQLAs). Canada, with its strong credit rating, has many assets that qualify for HQLA which have benefitted from this demand. In addition to the increased xdemand for HQLA, there is interest in these assets in the term space. Whether it is one-month rolling maturity structures or longer-dated fixed and extendible structured trades, borrowers are looking to utilise their balance sheets in more effective ways. Along with the interest for HQLA, there is a continuous need from borrowers to pledge a wider array of non-cash collateral including equities and investment grade corporate bonds as borrowers look to better manage their long portfolios. Beneficial owners who can accept a wider variety of collateral that fits within their risk parameters will be able to participate in a larger number of trades.
In addition, the trend continues towards less general collateral, short term borrowing, while interest remains for high demand specials. While the specials continue to be very name specific, the Canadian specials market benefitted from continued directional trading in the speciality pharmaceutical sector, for example, cannabis stocks. Short interest in this sector will continue to fluctuate with further merger and acquisition activity forecasted as the industry matures and consolidation takes hold. Continued volatility in global commodity prices is also expected, furthering directional short interest across the oil and mining sectors.
One final continuing trend is the steady interest in dividend yield enhancement trades, coupled with the dividend reinvestment plan (DRIP) trade. There are opportunities to put liquidity into the market around the events.
Kyle Kolasingh: The Canadian securities lending environment is experiencing rapid change on multiple fronts--from evolving collateral management practices to accelerating technology enablement. In addition, regulation is driving increased demand for financing and balance sheet optimisation and, in turn, HQLA. This latter trend stands out in today’s securities lending market where subdued levels of specials activity (for example, intrinsic value opportunities) continued into 2019. As global financial institutions look to bolster liquidity requirements, the demand for HQLA and, specifically, level-one assets on various term structures, is particularly strong. Coupled with beneficial owners’ growing awareness of the alpha-generating potential of such transactions, HQLA lending is expected to continue trending upwards, contributing to overall outperformance of fixed income assets in the securities lending market.
Are we seeing a growing use of non-cash collateral?
Tomada: Canada runs counter to many jurisdictions in the world, in that many participants have historically made use of primarily non-cash collateral, with a particular appetite for Canada’s own triple-A-rated sovereign debt. Beneficial owners, borrowers and regulators in Canada have shifted toward greater use of global sovereign debt, equities, cash and corporate bonds as collateral. Canadians using cash collateral have also expanded across a number of global currencies as well.
Kolasingh: Yes. Balance sheet efficiency is taking on growing importance in today’s environment. This is driving an increased focus on the impact of securities lending transactions on risk-weighted asset exposures and capital ratio requirements. As a result, we are seeing higher demand for non-cash collateral and the expansion of such collateral to include additional equity indices, American depositary receipts (ADRs) and exchange-traded funds (ETFs). Participants in the Canadian market have traditionally been at the forefront of using non-cash collateral and, as the securities lending market continues to evolve, we see other markets, including Europe, trending closer to the Canadian collateral landscape.
Sedman: In Canada, there has always been a preference for non-cash collateral with the likelihood that this trend will continue to be the case for the foreseeable future. As balance sheet efficiency and collateral management continue to be a primary focus for borrowers, non-cash collateral is a means for borrowers to optimise their long holdings and reducing their financing costs. As borrowers look to more efficiently utilise their balance sheets and long portfolios to collateralise various trading strategies, our expectation is that non-cash collateral balances will continue to grow going forward. Beneficial owners can put themselves in a position to take advantage of this preference by reviewing their collateral guidelines and ensuring they are aligned with the trend toward non-cash collateral.
Similarly, the US is seeing a rising amount of non-cash collateral, to the point where it has become a preferred option for many borrowers. The US is more restrictive in terms of the types of non-cash collateral accepted, but there are discussions to allow borrowers to pledge equities as collateral for securities lending programmes. Certainly, the Canadian model is a great example of diversified, non-cash collateral set for securities lending which can provide liquidity and diversification to both borrowers and lenders.
Polseno: Yes, we have seen interest growing in notional volume as well as the actual types of collateral that borrowers wish to use. Equity collateral is most in demand as prime brokers want to utilise their long book efficiently, but we also see interest in corporate and government securities as well.
Lemstra: According to DataLend, the cash versus non-cash on-loan breakdown has been averaging 17 percent cash and 83 percent non-cash for the last 12 months. Canadian beneficial owners are concentrated in the non-cash space, with 90 percent of them taking non-cash collateral and 10 percent allowing mixed collateral, inclusive of cash.
What regulatory restrictions exist in Canada around collateral usage?
Kolasingh: In Canada, mutual funds are regulated by National Instrument 81-102-Investment Funds, which has a narrower scope of eligible collateral than Office of the Superintendent of Financial Institutions (OSFI) B-4, which provides guidelines for other market participants such as operating memorandum funds, pension plans, insurance companies and government institutions. As the market increasingly moves towards non-cash collateral and, specifically equities, the current limitations associated with NI 81-102 stand to reduce access to lending opportunities where collateral flexibility is paramount. It is important to note that discussions are continuing within the industry to help level the playing field for all participants.
Sedman: Beneficial owners should take the time to understand what types of collateral they want to accept. A programme that accepts a range of collateral provides benefits such as diversification as well as opportunities to participate in a wider range of loans. It is common practice for Canadian clients to accept equities and fixed income collateral in their securities lending programmes.
Polseno: The regulatory restrictions reside for the most part on the client side. Similar to the US, where changes in the collateral guidelines of Rule 15c3-3 are being sought from the US Securities and Exchange Commission (SEC), there are efforts to have equity collateral approved for Canadian mutual funds, which will allow them to participate in the changes in demand mentioned earlier. For Canadian borrowers, there are generally no prohibitions in what they can pledge and the environment functions quite similarly to the UK and Europe.
Tomada: Canada’s investment industry rules restrict mutual funds from taking equities as collateral. Mutual funds are also prevented from pushing more than three months out on the reinvestment curve. These provisions can potentially disadvantage mutual funds versus pension plan sponsors and insurance companies in Canada as these types of firms are not subject to the same restrictions. This is an area where the Canadian Securities Lending Association (CASLA) has been working with regulators to flatten the playing field between the various beneficial owner classes.
How is technology impacting securities lending?
Polseno: Technology is making a marked impact on trading efficiencies within securities lending. We have the ability to trade our entire universe of assets electronically now and are seeing flows in warms and specials increasing over time as borrowers embrace that mode of borrowing. This automation takes the time pressure off of traders and allows for a much larger set of securities to be traded efficiently. There have also been good developments in post-trade systems that are allowing for greater transparency into collateral allocations and collateral management, income processing and contract management. This allows for more robust trading activity without increasing operational burdens and it also allows the market to operate in a more risk excellent environment.
Lemstra: The technology budget has to be a significant piece of a strategic business process to support the interoperability, connectivity and innovation needed to meet the new requirements being driven by regulation and key revenue opportunities on the horizon.
Where two years ago the market only automated the general collateral (GC) business, now their investment in trading and pricing logic, as well as system connectivity, has brought the market to a place where they are automating their non-GC business through the rate spectrum. We’ve heard some clients say they have up to 70 percent of their business trading systematically through automated trade execution.
Regulation is prompting the industry to implement technology solutions to those last brackets of legacy manual processes. Regulatory obligations turn into technology investment as the industry looks to near-real-time communication to effectively manage trade execution, intraday pre-matching and exposure throughout the trade lifecycle.
Sedman: Technology and automation are primary focuses for both Northern Trust and the industry and will have a large impact on the future of the lending business. There continues to be a focus on pre-trade, trade and post-trade automation to increase efficiencies. Borrowers and lenders are working together to try and reduce operational differences. Northern Trust has expanded its use of vendor platforms to significantly increase straight-through processing capabilities, and bring increased levels of transparency and efficiency.
Northern Trust is using machine learning to more effectively price trade activity. Keeping in mind that securities lending is not just about the individual trade, but a large, diversified book of loans, it is important to effectively manage rates with the borrowers.
CCPs are another area that continues to show promise for securities lending. There are several models that are being evaluated and would help bring additional transparency, operational efficiencies and diversification to the securities lending market. The challenge is offering a model that works well for the agency securities lending model so that we can benefit our beneficial owners.
Tomada: Too often people point to technology as displacing jobs, but we actually see automation as a “good jobs” strategy. New technologies help drive efficiency by automating most straightforward, predictable and repetitive tasks—these tasks are often not only the least engaging but also areas where the manual processing can introduce potential errors. Automating some of these tasks empowers people to focus on value-add activities, new solutions and client service and in turn help position us to deliver better results for our clients and stakeholders.
Kolasingh: Technology touches upon almost every aspect of the industry—from the way we transact to how we price trades, monitor risk and interact with our lenders. As a result of RBC I&TS’ focus on connectivity, the majority of our transactions are automated. This supports a high degree of straight-through processing and allows our traders to focus on high-intrinsic value opportunities. Additionally, technology advancements, combined with enriched data sets, are enabling beneficial owners to make quicker and more informed decisions. As lenders become increasingly involved in their securities lending programmes, powerful data visualisation tools are being developed to provide insights on performance, programme parameters and risk management. At the same time, application programming interfaces (APIs) are delivering meaningful data sets across organisations in an efficient manner. This has enabled lenders to take a more proactive approach to lending and uncover opportunities, such as corporate action optimisation, to quantify restricted or non-lendable assets and create further alpha generation.
What opportunities are on the horizon for Canada’s securities lending market?
Lemstra: Emerging technologies such as machine learning, shared ledger, cloud management and API connectivity offer opportunities for the industry to explore. We see clients using data to achieve smarter logic for data-driven automated pricing and optimisation decisions, and they are exploring machine learning to add efficiency to the reconciliation and operational processes. EquiLend is also actively working in all these areas. Firms can leverage trends like a required regulatory investment to support strategic investment for their clients and the business.
As one of the world’s largest securities finance markets, the emerging themes in Canada reflect the global trends. Firms are becoming much more sophisticated with their logic for pricing decisions. The tri-party model is becoming more attractive for some players. Market participants are also evaluating their legacy books and record systems as they recognise the value in investing in cutting-edge technology to be poised for future growth, part of the reason we have seen a strong interest in our EquiLend Spire solution. Finally, we are also seeing a growing commitment to diversity and gender equality across the industry, which we support and expect to continue. As a leading market infrastructure with a commitment to innovation, EquiLend will continue to lead the way on future changes to the securities finance marketplace.
Sedman: There are expanded collateral acceptability and increased term trade opportunities on both collateral upgrade trades and in demand specials for the Canadian securities lending market. As mentioned previously, there has been an increase in demand for fixed income securities, specifically for HQLA, which would include Canadian sovereign debt. This has been a theme over the last several years as borrowers have adapted to the new regulatory requirements. On the other side of this trade, borrowers want to pledge a variety of collateral including equities and corporate debt.
Another opportunity is the lack of liquidity in certain securities around proxy voting periods. The Canadian securities lending market tends to experience some cyclical demand based on proxy voting. Lenders should understand whether it makes sense to lend their securities over the proxy period and to gain additional income.
Polseno: There are opportunities to expand technologically that are exciting. Getting full buy-in by all market participants will take time but is well worth it. Expansion of collateral use will bring with it new trade structures, increased use of term non-cash borrowing for financing purposes, and opportunities in the HQLA space.
Ever growing participation by beneficial owners either directly or through agents will continue to help the market expand and evolve. This may help motivate regulatory change that allows for even further growth. Canadian banks have been taking a much more global view, both expanding the remits locally and also in their actual presence in countries around the world with growth in staffing levels. I think this is a positive and what was once a fairly closed market has opened up in a tangible way. This means an increase in trading counterparties, clients and products that will make the Canadian market truly a global one.
Kolasingh: We continue to see greater participation in securities lending programmes among our clients, combined with a shift to a more granular and consultative beneficial owner-agent lender relationship. The industry has experienced substantial change since the 2008 financial crisis and, concurrent with developments in technology and risk management, an increasing number of beneficial owners are either returning to securities lending or opting to participate in lending programmes for the first time. Whether it’s to offset costs or to take advantage of leverage strategies, beneficial owners are looking for closer relationships with their agent lender and a deeper understanding of the dynamics of lending. At the same time, asset managers are increasingly looking to securities lending as a means to reduce fee structures and increase competitiveness. This is enabling managers to capitalise on greater intrinsic value opportunities, helping to dispel the traditional negative connotations associated with short-selling and securities lending. I should mention that, while these changes are occurring in Canada, many are being experienced globally as well.
Tomada: The rise of liquid alternatives offerings in Canada as a result of new regulatory approaches means the potential for an array of new fund offerings, new participants and new providers into the market.
Canada is also likely to see ongoing investment by market participants in technology solutions that help drive efficiency and effectiveness. The march of technology will be particularly powerful as beneficial owners such as Canada’s pension complexes continue to sharpen their sophistication when it comes to securities finance—great news for providers who can deliver the advanced solutions, reporting and strategies to help them achieve their goals. I think it is also safe to say that Canada will retain one of its most central characteristics amid a wide array of change: the strong and positive engagement between market participants and regulators.
Alexa Lemstra: It’s good to be a Canadian. According to DataLend, Q1 2019 revenue is up 29.5 percent over Q1 2018, and that growth is driven almost exclusively by cannabis stocks in the health care sector.
Based on their strong home market foundations, the Canadian banks have invested in and developed beyond their Canadian presence, expanding to US and European markets to become truly global players. There is a strong drive of innovation and expansion to provide solutions for their clients and a “get it done” attitude. Strategic investment in collateral management, settlement efficiency and automation are paramount. Solutions for legacy systems still mandate considerable attention as the participants grow and the business expands.
Jarrod Polseno: We are now seeing some of the trends from the US taking hold in the Canadian securities lending market. A broader take-up of technology, as well as expansion in the appetite for a wider variety of collateral types, are primary examples. We are now in a position to price our entire universe of securities and both disseminate our book through next-generation trading (NGT) and consume lists with a bid to help automate flows outside of the general collateral sphere. We see Canadian borrowers beginning to have interest in facing us electronically to a greater extent and to realise the operational benefits of it. We also see increased interest in non-cash collateral—as the prime brokers look to be more efficient with their collateral, they will look to pledge a wider array, which is consistent with their peers around the globe.
Lisa Tomada: Canada is known for having a strong body of very sophisticated market participants, such as our large and mid-size pension asset managers. We are certainly seeing beneficial owners move up the sophistication curve in terms of their strategies as well as their need for advanced reporting to deliver confidence to their underlying stakeholders.
In addition, we’re seeing an ongoing shift to implement an array of technology enhancements. For example, auto-return features and contract compare technologies can enable more efficient processes, as well as help, reduce risks by mitigating the potential for manual processing errors. The benefits also extend to client service, as these new tools help free up our team to focus on client service and more complex activities in support of clients, in turn delivering a stronger service experience for borrowers and owners in our programme.
Dave Sedman: A number of trends emerged over the past year, with one of the major ones being an increase in demand for fixed income securities, specifically high-quality liquid assets (HQLAs). Canada, with its strong credit rating, has many assets that qualify for HQLA which have benefitted from this demand. In addition to the increased xdemand for HQLA, there is interest in these assets in the term space. Whether it is one-month rolling maturity structures or longer-dated fixed and extendible structured trades, borrowers are looking to utilise their balance sheets in more effective ways. Along with the interest for HQLA, there is a continuous need from borrowers to pledge a wider array of non-cash collateral including equities and investment grade corporate bonds as borrowers look to better manage their long portfolios. Beneficial owners who can accept a wider variety of collateral that fits within their risk parameters will be able to participate in a larger number of trades.
In addition, the trend continues towards less general collateral, short term borrowing, while interest remains for high demand specials. While the specials continue to be very name specific, the Canadian specials market benefitted from continued directional trading in the speciality pharmaceutical sector, for example, cannabis stocks. Short interest in this sector will continue to fluctuate with further merger and acquisition activity forecasted as the industry matures and consolidation takes hold. Continued volatility in global commodity prices is also expected, furthering directional short interest across the oil and mining sectors.
One final continuing trend is the steady interest in dividend yield enhancement trades, coupled with the dividend reinvestment plan (DRIP) trade. There are opportunities to put liquidity into the market around the events.
Kyle Kolasingh: The Canadian securities lending environment is experiencing rapid change on multiple fronts--from evolving collateral management practices to accelerating technology enablement. In addition, regulation is driving increased demand for financing and balance sheet optimisation and, in turn, HQLA. This latter trend stands out in today’s securities lending market where subdued levels of specials activity (for example, intrinsic value opportunities) continued into 2019. As global financial institutions look to bolster liquidity requirements, the demand for HQLA and, specifically, level-one assets on various term structures, is particularly strong. Coupled with beneficial owners’ growing awareness of the alpha-generating potential of such transactions, HQLA lending is expected to continue trending upwards, contributing to overall outperformance of fixed income assets in the securities lending market.
Are we seeing a growing use of non-cash collateral?
Tomada: Canada runs counter to many jurisdictions in the world, in that many participants have historically made use of primarily non-cash collateral, with a particular appetite for Canada’s own triple-A-rated sovereign debt. Beneficial owners, borrowers and regulators in Canada have shifted toward greater use of global sovereign debt, equities, cash and corporate bonds as collateral. Canadians using cash collateral have also expanded across a number of global currencies as well.
Kolasingh: Yes. Balance sheet efficiency is taking on growing importance in today’s environment. This is driving an increased focus on the impact of securities lending transactions on risk-weighted asset exposures and capital ratio requirements. As a result, we are seeing higher demand for non-cash collateral and the expansion of such collateral to include additional equity indices, American depositary receipts (ADRs) and exchange-traded funds (ETFs). Participants in the Canadian market have traditionally been at the forefront of using non-cash collateral and, as the securities lending market continues to evolve, we see other markets, including Europe, trending closer to the Canadian collateral landscape.
Sedman: In Canada, there has always been a preference for non-cash collateral with the likelihood that this trend will continue to be the case for the foreseeable future. As balance sheet efficiency and collateral management continue to be a primary focus for borrowers, non-cash collateral is a means for borrowers to optimise their long holdings and reducing their financing costs. As borrowers look to more efficiently utilise their balance sheets and long portfolios to collateralise various trading strategies, our expectation is that non-cash collateral balances will continue to grow going forward. Beneficial owners can put themselves in a position to take advantage of this preference by reviewing their collateral guidelines and ensuring they are aligned with the trend toward non-cash collateral.
Similarly, the US is seeing a rising amount of non-cash collateral, to the point where it has become a preferred option for many borrowers. The US is more restrictive in terms of the types of non-cash collateral accepted, but there are discussions to allow borrowers to pledge equities as collateral for securities lending programmes. Certainly, the Canadian model is a great example of diversified, non-cash collateral set for securities lending which can provide liquidity and diversification to both borrowers and lenders.
Polseno: Yes, we have seen interest growing in notional volume as well as the actual types of collateral that borrowers wish to use. Equity collateral is most in demand as prime brokers want to utilise their long book efficiently, but we also see interest in corporate and government securities as well.
Lemstra: According to DataLend, the cash versus non-cash on-loan breakdown has been averaging 17 percent cash and 83 percent non-cash for the last 12 months. Canadian beneficial owners are concentrated in the non-cash space, with 90 percent of them taking non-cash collateral and 10 percent allowing mixed collateral, inclusive of cash.
What regulatory restrictions exist in Canada around collateral usage?
Kolasingh: In Canada, mutual funds are regulated by National Instrument 81-102-Investment Funds, which has a narrower scope of eligible collateral than Office of the Superintendent of Financial Institutions (OSFI) B-4, which provides guidelines for other market participants such as operating memorandum funds, pension plans, insurance companies and government institutions. As the market increasingly moves towards non-cash collateral and, specifically equities, the current limitations associated with NI 81-102 stand to reduce access to lending opportunities where collateral flexibility is paramount. It is important to note that discussions are continuing within the industry to help level the playing field for all participants.
Sedman: Beneficial owners should take the time to understand what types of collateral they want to accept. A programme that accepts a range of collateral provides benefits such as diversification as well as opportunities to participate in a wider range of loans. It is common practice for Canadian clients to accept equities and fixed income collateral in their securities lending programmes.
Polseno: The regulatory restrictions reside for the most part on the client side. Similar to the US, where changes in the collateral guidelines of Rule 15c3-3 are being sought from the US Securities and Exchange Commission (SEC), there are efforts to have equity collateral approved for Canadian mutual funds, which will allow them to participate in the changes in demand mentioned earlier. For Canadian borrowers, there are generally no prohibitions in what they can pledge and the environment functions quite similarly to the UK and Europe.
Tomada: Canada’s investment industry rules restrict mutual funds from taking equities as collateral. Mutual funds are also prevented from pushing more than three months out on the reinvestment curve. These provisions can potentially disadvantage mutual funds versus pension plan sponsors and insurance companies in Canada as these types of firms are not subject to the same restrictions. This is an area where the Canadian Securities Lending Association (CASLA) has been working with regulators to flatten the playing field between the various beneficial owner classes.
How is technology impacting securities lending?
Polseno: Technology is making a marked impact on trading efficiencies within securities lending. We have the ability to trade our entire universe of assets electronically now and are seeing flows in warms and specials increasing over time as borrowers embrace that mode of borrowing. This automation takes the time pressure off of traders and allows for a much larger set of securities to be traded efficiently. There have also been good developments in post-trade systems that are allowing for greater transparency into collateral allocations and collateral management, income processing and contract management. This allows for more robust trading activity without increasing operational burdens and it also allows the market to operate in a more risk excellent environment.
Lemstra: The technology budget has to be a significant piece of a strategic business process to support the interoperability, connectivity and innovation needed to meet the new requirements being driven by regulation and key revenue opportunities on the horizon.
Where two years ago the market only automated the general collateral (GC) business, now their investment in trading and pricing logic, as well as system connectivity, has brought the market to a place where they are automating their non-GC business through the rate spectrum. We’ve heard some clients say they have up to 70 percent of their business trading systematically through automated trade execution.
Regulation is prompting the industry to implement technology solutions to those last brackets of legacy manual processes. Regulatory obligations turn into technology investment as the industry looks to near-real-time communication to effectively manage trade execution, intraday pre-matching and exposure throughout the trade lifecycle.
Sedman: Technology and automation are primary focuses for both Northern Trust and the industry and will have a large impact on the future of the lending business. There continues to be a focus on pre-trade, trade and post-trade automation to increase efficiencies. Borrowers and lenders are working together to try and reduce operational differences. Northern Trust has expanded its use of vendor platforms to significantly increase straight-through processing capabilities, and bring increased levels of transparency and efficiency.
Northern Trust is using machine learning to more effectively price trade activity. Keeping in mind that securities lending is not just about the individual trade, but a large, diversified book of loans, it is important to effectively manage rates with the borrowers.
CCPs are another area that continues to show promise for securities lending. There are several models that are being evaluated and would help bring additional transparency, operational efficiencies and diversification to the securities lending market. The challenge is offering a model that works well for the agency securities lending model so that we can benefit our beneficial owners.
Tomada: Too often people point to technology as displacing jobs, but we actually see automation as a “good jobs” strategy. New technologies help drive efficiency by automating most straightforward, predictable and repetitive tasks—these tasks are often not only the least engaging but also areas where the manual processing can introduce potential errors. Automating some of these tasks empowers people to focus on value-add activities, new solutions and client service and in turn help position us to deliver better results for our clients and stakeholders.
Kolasingh: Technology touches upon almost every aspect of the industry—from the way we transact to how we price trades, monitor risk and interact with our lenders. As a result of RBC I&TS’ focus on connectivity, the majority of our transactions are automated. This supports a high degree of straight-through processing and allows our traders to focus on high-intrinsic value opportunities. Additionally, technology advancements, combined with enriched data sets, are enabling beneficial owners to make quicker and more informed decisions. As lenders become increasingly involved in their securities lending programmes, powerful data visualisation tools are being developed to provide insights on performance, programme parameters and risk management. At the same time, application programming interfaces (APIs) are delivering meaningful data sets across organisations in an efficient manner. This has enabled lenders to take a more proactive approach to lending and uncover opportunities, such as corporate action optimisation, to quantify restricted or non-lendable assets and create further alpha generation.
What opportunities are on the horizon for Canada’s securities lending market?
Lemstra: Emerging technologies such as machine learning, shared ledger, cloud management and API connectivity offer opportunities for the industry to explore. We see clients using data to achieve smarter logic for data-driven automated pricing and optimisation decisions, and they are exploring machine learning to add efficiency to the reconciliation and operational processes. EquiLend is also actively working in all these areas. Firms can leverage trends like a required regulatory investment to support strategic investment for their clients and the business.
As one of the world’s largest securities finance markets, the emerging themes in Canada reflect the global trends. Firms are becoming much more sophisticated with their logic for pricing decisions. The tri-party model is becoming more attractive for some players. Market participants are also evaluating their legacy books and record systems as they recognise the value in investing in cutting-edge technology to be poised for future growth, part of the reason we have seen a strong interest in our EquiLend Spire solution. Finally, we are also seeing a growing commitment to diversity and gender equality across the industry, which we support and expect to continue. As a leading market infrastructure with a commitment to innovation, EquiLend will continue to lead the way on future changes to the securities finance marketplace.
Sedman: There are expanded collateral acceptability and increased term trade opportunities on both collateral upgrade trades and in demand specials for the Canadian securities lending market. As mentioned previously, there has been an increase in demand for fixed income securities, specifically for HQLA, which would include Canadian sovereign debt. This has been a theme over the last several years as borrowers have adapted to the new regulatory requirements. On the other side of this trade, borrowers want to pledge a variety of collateral including equities and corporate debt.
Another opportunity is the lack of liquidity in certain securities around proxy voting periods. The Canadian securities lending market tends to experience some cyclical demand based on proxy voting. Lenders should understand whether it makes sense to lend their securities over the proxy period and to gain additional income.
Polseno: There are opportunities to expand technologically that are exciting. Getting full buy-in by all market participants will take time but is well worth it. Expansion of collateral use will bring with it new trade structures, increased use of term non-cash borrowing for financing purposes, and opportunities in the HQLA space.
Ever growing participation by beneficial owners either directly or through agents will continue to help the market expand and evolve. This may help motivate regulatory change that allows for even further growth. Canadian banks have been taking a much more global view, both expanding the remits locally and also in their actual presence in countries around the world with growth in staffing levels. I think this is a positive and what was once a fairly closed market has opened up in a tangible way. This means an increase in trading counterparties, clients and products that will make the Canadian market truly a global one.
Kolasingh: We continue to see greater participation in securities lending programmes among our clients, combined with a shift to a more granular and consultative beneficial owner-agent lender relationship. The industry has experienced substantial change since the 2008 financial crisis and, concurrent with developments in technology and risk management, an increasing number of beneficial owners are either returning to securities lending or opting to participate in lending programmes for the first time. Whether it’s to offset costs or to take advantage of leverage strategies, beneficial owners are looking for closer relationships with their agent lender and a deeper understanding of the dynamics of lending. At the same time, asset managers are increasingly looking to securities lending as a means to reduce fee structures and increase competitiveness. This is enabling managers to capitalise on greater intrinsic value opportunities, helping to dispel the traditional negative connotations associated with short-selling and securities lending. I should mention that, while these changes are occurring in Canada, many are being experienced globally as well.
Tomada: The rise of liquid alternatives offerings in Canada as a result of new regulatory approaches means the potential for an array of new fund offerings, new participants and new providers into the market.
Canada is also likely to see ongoing investment by market participants in technology solutions that help drive efficiency and effectiveness. The march of technology will be particularly powerful as beneficial owners such as Canada’s pension complexes continue to sharpen their sophistication when it comes to securities finance—great news for providers who can deliver the advanced solutions, reporting and strategies to help them achieve their goals. I think it is also safe to say that Canada will retain one of its most central characteristics amid a wide array of change: the strong and positive engagement between market participants and regulators.
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