Top five takeaways
15 October 2019
SLT unpacks the major talking points of the IMN Beneficial Owners’ Conference in London, which hosted panels that touched on technology, collateral and new revenue opportunities
Image: Shutterstock
The 24th Annual European Beneficial Owners’ Securities Finance and Collateral Management Conference in London offered an opportunity for lenders to rub shoulders with their peers and other demographics of the industry that they may not unusual get to interact with to discuss their securities lending strategies and thoughts on the market.
This year’s conference covered a wide array of topics from the lags in global revenue in the first half of 2019, to the evergreen debate around collateral flexibility, and the role of emerging technologies in cutting costs and improving overall market efficiency. SLT looks back at some of the key takeaways from the two-day event.
1) Lending revenue turned a corner in Q3
Delegates heard from a diverse panel of industry participants why it has been a challenging year for securities lending revenue so far, with the fixed income segment especially facing major headwinds, compared to equities. Q2 equity revenues were largely propped up by a limited number of ‘specials’, mostly based in North America, that had commanded borrow fees several times above the market average.
Conference panellist Nancy Allen, global product owner at DataLend, painted a bleak global picture when she explained that global year-to-date revenue (as of August 31) was down approximately 16 percent compared to the same period in 2018. Although, this news was caveated by the fact that 2018 saw the largest revenue generation since the 2008 financial crisis. It was also noted that revenue short-fall has been ubiquitous across all three major regions.
However, discussing Q3 revenue on the opening panel for the day, Paul Wilson, global head of IHS Markit Securities Finance, told delegates that it is on pace to be the first quarter of 2019 with year-over-year growth. He added that improved equity revenues are offsetting declines in fixed income.
According to Wilson, the key metric this year is the number of high-value specials in the US with more than 200 securities having fees that at one time or another traded above 50 percent. However, he also explained that this means revenue is therefore quite concentrated and is potentially masking other downward trends.
On the same panel, eSecLending CEO Craig Starble pointed out that there has been rate volatility and fluctuation due to Federal Reserve intervention in the US overnight repo market along with geopolitical issues, which have contributed to additional revenue opportunities.
2)The supply/demand balance is tipping the wrong way
Later in the day, Starble explained that the global pool of lendable securities has increased but, at the same time, spread compression and deteriorating demand continues to plague the market. “Hedge funds and other risk-takers have been challenged for trade opportunities and that has contributed to the decrease in demand, especially in the North American markets, outside of a few top concentrated specials in initial public offering securities or cannabis companies,” Starble noted.
Panellists agreed that new supplies of securities were always welcome but, coupled with the loss of borrower demand, it means the already heavily lopsided supply/demand imbalance in favour of borrowers is still increasing.
Starble added: “Clients who are engaged in their lending programmes and are evolving their collateral guidelines, considering new lending markets, participating in elections or other corporate action events and finding ways to capture alternative trade opportunities are the ones capturing the greater share of revenue in the marketplace.”
3) Blockchain: Reliable steed or magic unicorn?
As has been the case for several years now at all industry events, conversations around technology drifted inevitably towards blockchain, which appears to be the securities finance industry’s version of Godwin’s Law. Largely, panellists were bullish about the potential of blockchain to add value to the market in terms of transparency and cost-cutting, but most predictions became less certain when it came to the timeframe.
“The infrastructure around blockchain is a good one and it is something our industry can eventually wrap its arms around,” said eSecLending’s Starble. “Even though the larger institutions like the global custody banks and DTCC have started to explore blockchain technology, the universal adoption will take a longer period and will not occur within the next few years.”
Panellists were given a further reality check on their ambitions for distributed ledger technology (DLT) and blockchain in the form of a one-to-one conversation between SecFinHub’s Bill Foley and Greg Chew, founder and CEO at QPQ, a fintech firm that aims to automate and digitalise transactional processes using proprietary ‘smart’ legal contracts and treasury accounts.
Commenting on the blockchain phenomenon, Chew said: “Blockchain/DLT is a nascent technology whose primary attribute is to remove the need for third-party trust. Where that core function is not necessary, such as within an established group, or can be achieved but without cost-effectiveness that more established services would provide – such as cloud databases, cloud computing, etc – then the use case for blockchain/DLT is not made.”
He went on to say that there is no magic in DLT as it is the mechanisation of a process that can be achieved by manual processes of notation and submission for confirmation of consensus.
According to Chew, blockchain will be part of a suite of emerging technologies that contribute to the digitalisation of the market, “but in-and-of-itself it [blockchain] has few truly commercial stand-alone applications”.
Chew said the industry should expect the wider picture around the technology to change rapidly and the place of DLT to become more enabling rather than front-of-house.
“A more nuanced approach is needed that puts investment into emerging technology where straight questions get straight answers and nobody is talking about, metaphorically, unicorns transporting leprechauns from the money tree to the wishing well,” Chew concluded.
4) ESG is here to stay
The topic of environmental, social and governance (ESG) is of increasing interest in the securities finance world and has been a conference panel-topic staple throughout 2019. Panellist Sharon Terry, securities finance trader at Aviva Investors, said: “We [Aviva Investors] have funds that look to promote ESG practices, but it is important that there is flexibility. I’m not sure clients would want one-size-to-fit-all. There are different funds with different values and criteria.”
Panel moderator, John Arnensen, co-practice lead at Pierpoint Financial Consulting, asked speakers, including two beneficial owners and an agent lender, to outline to what extent ESG compliance has influenced decisions of portfolio managers.
In response, Terry replied: “Clients are constantly asking what we are doing to integrate ESG into our investment process. We integrate ESG into investment analysis and decision-making to meet our client’s criteria. It’s not just about the investment process itself, it is about looking at the company as a whole, and how diversity leads to a stronger board. It’s not just about targets, it’s about having the right people in the right jobs.”
Meanwhile, fellow panellist Matthew Chessum, investment manager at Aberdeen Standard Investments, said that ESG is embedded across all of the investment processes that Aberdeen runs. He explained that the main driver behind ESG investing is to increase corporate standards which are becoming more important.
“Clients are very interested in understanding how our focus of ESG is embedded in our investment management process. The momentum behind this practice is picking up and it is only going to become more important as time goes on,” he added.
Questions were raised by audience members around how significant a challenge the added layer of complexity that the ESG policies of lenders pose to borrowers looking to post collateral for securities financing transactions.
Terry answered that collateral regarding ESG is a newer area for Aviva and that it has implemented a baseline ESG collateral screen.
“However, we have the ability to implement a more specific collateral screen should the client require it. Beneficial owners need to give their lenders clear instructions as to what companies they want to exclude,” Terry affirmed.
Short selling and its relationship with ESG also became a topic of discussion during the panel. Chessum highlighted the market had moved a long way in terms of regulating short-selling compared to 10-15 years ago and that naked short selling is banned in almost all financial markets.
“Is covered short-selling fully aligned with ESG principles? I believe that it is as it promotes price discovery and in some instances helps highlights poor corporate behaviour,” he explained.
5) Data demands
Data continues to pop-up as a popular topic at securities finance industry events, and IMN was no different. Discussing the uses of data as a beneficial owner, Allen explained that historically, lending data was primarily used for price transparency, liquidity and benchmarking.
According to Allen, until recently, most beneficial owners did not consume data directly and did not integrate securities lending data into their wider portfolio strategies, but that was changing. Today, beneficial owners require greater transparency as they transition to a more active and engaged lending programme.
A recent beneficial owner survey by DataLend and Funds Europe showed that 66 percent of beneficial owners participate in securities lending to generate alpha. Allen noted that that’s up 7 percent from their previous survey conducted in 2017.
As a result, beneficial owners are now demanding more detailed data and analytics to drive their decision making. The survey further showed that today, 81 percent of beneficial owner respondents are actively using data to manage their programme.
The panel’s moderator, Bill Foley, director of SecFinHub, asked panellists what the one piece of advice they would give beneficial owners was on how to use data.
Samir Dhrolia, vice president of global derivatives, trading and index portfolio management at British Columbia Investment Managment Corporation, commented: “If you want to make more out of the programme then you have to do more heavy lifting, and you have to become obsessed with data. There is money on the table, but it is difficult to get. Start collecting data, building tools, and embrace derivatives.”
“Beneficial owners, agent lenders and broker-dealers are all beginning to integrate securities lending data alongside other data sets,” Allen explained. “Whether it be to drive securities lending trading algorithms to optimise collateral or to use it more broadly for portfolio construction, securities lending data is being used to drive decision making.”
Allen added that it will be exciting to see lending data incorporated into artificial intelligence and machine learning algorithms, allowing market participants to apply predictive analytics to their securities lending programmes.
This year’s conference covered a wide array of topics from the lags in global revenue in the first half of 2019, to the evergreen debate around collateral flexibility, and the role of emerging technologies in cutting costs and improving overall market efficiency. SLT looks back at some of the key takeaways from the two-day event.
1) Lending revenue turned a corner in Q3
Delegates heard from a diverse panel of industry participants why it has been a challenging year for securities lending revenue so far, with the fixed income segment especially facing major headwinds, compared to equities. Q2 equity revenues were largely propped up by a limited number of ‘specials’, mostly based in North America, that had commanded borrow fees several times above the market average.
Conference panellist Nancy Allen, global product owner at DataLend, painted a bleak global picture when she explained that global year-to-date revenue (as of August 31) was down approximately 16 percent compared to the same period in 2018. Although, this news was caveated by the fact that 2018 saw the largest revenue generation since the 2008 financial crisis. It was also noted that revenue short-fall has been ubiquitous across all three major regions.
However, discussing Q3 revenue on the opening panel for the day, Paul Wilson, global head of IHS Markit Securities Finance, told delegates that it is on pace to be the first quarter of 2019 with year-over-year growth. He added that improved equity revenues are offsetting declines in fixed income.
According to Wilson, the key metric this year is the number of high-value specials in the US with more than 200 securities having fees that at one time or another traded above 50 percent. However, he also explained that this means revenue is therefore quite concentrated and is potentially masking other downward trends.
On the same panel, eSecLending CEO Craig Starble pointed out that there has been rate volatility and fluctuation due to Federal Reserve intervention in the US overnight repo market along with geopolitical issues, which have contributed to additional revenue opportunities.
2)The supply/demand balance is tipping the wrong way
Later in the day, Starble explained that the global pool of lendable securities has increased but, at the same time, spread compression and deteriorating demand continues to plague the market. “Hedge funds and other risk-takers have been challenged for trade opportunities and that has contributed to the decrease in demand, especially in the North American markets, outside of a few top concentrated specials in initial public offering securities or cannabis companies,” Starble noted.
Panellists agreed that new supplies of securities were always welcome but, coupled with the loss of borrower demand, it means the already heavily lopsided supply/demand imbalance in favour of borrowers is still increasing.
Starble added: “Clients who are engaged in their lending programmes and are evolving their collateral guidelines, considering new lending markets, participating in elections or other corporate action events and finding ways to capture alternative trade opportunities are the ones capturing the greater share of revenue in the marketplace.”
3) Blockchain: Reliable steed or magic unicorn?
As has been the case for several years now at all industry events, conversations around technology drifted inevitably towards blockchain, which appears to be the securities finance industry’s version of Godwin’s Law. Largely, panellists were bullish about the potential of blockchain to add value to the market in terms of transparency and cost-cutting, but most predictions became less certain when it came to the timeframe.
“The infrastructure around blockchain is a good one and it is something our industry can eventually wrap its arms around,” said eSecLending’s Starble. “Even though the larger institutions like the global custody banks and DTCC have started to explore blockchain technology, the universal adoption will take a longer period and will not occur within the next few years.”
Panellists were given a further reality check on their ambitions for distributed ledger technology (DLT) and blockchain in the form of a one-to-one conversation between SecFinHub’s Bill Foley and Greg Chew, founder and CEO at QPQ, a fintech firm that aims to automate and digitalise transactional processes using proprietary ‘smart’ legal contracts and treasury accounts.
Commenting on the blockchain phenomenon, Chew said: “Blockchain/DLT is a nascent technology whose primary attribute is to remove the need for third-party trust. Where that core function is not necessary, such as within an established group, or can be achieved but without cost-effectiveness that more established services would provide – such as cloud databases, cloud computing, etc – then the use case for blockchain/DLT is not made.”
He went on to say that there is no magic in DLT as it is the mechanisation of a process that can be achieved by manual processes of notation and submission for confirmation of consensus.
According to Chew, blockchain will be part of a suite of emerging technologies that contribute to the digitalisation of the market, “but in-and-of-itself it [blockchain] has few truly commercial stand-alone applications”.
Chew said the industry should expect the wider picture around the technology to change rapidly and the place of DLT to become more enabling rather than front-of-house.
“A more nuanced approach is needed that puts investment into emerging technology where straight questions get straight answers and nobody is talking about, metaphorically, unicorns transporting leprechauns from the money tree to the wishing well,” Chew concluded.
4) ESG is here to stay
The topic of environmental, social and governance (ESG) is of increasing interest in the securities finance world and has been a conference panel-topic staple throughout 2019. Panellist Sharon Terry, securities finance trader at Aviva Investors, said: “We [Aviva Investors] have funds that look to promote ESG practices, but it is important that there is flexibility. I’m not sure clients would want one-size-to-fit-all. There are different funds with different values and criteria.”
Panel moderator, John Arnensen, co-practice lead at Pierpoint Financial Consulting, asked speakers, including two beneficial owners and an agent lender, to outline to what extent ESG compliance has influenced decisions of portfolio managers.
In response, Terry replied: “Clients are constantly asking what we are doing to integrate ESG into our investment process. We integrate ESG into investment analysis and decision-making to meet our client’s criteria. It’s not just about the investment process itself, it is about looking at the company as a whole, and how diversity leads to a stronger board. It’s not just about targets, it’s about having the right people in the right jobs.”
Meanwhile, fellow panellist Matthew Chessum, investment manager at Aberdeen Standard Investments, said that ESG is embedded across all of the investment processes that Aberdeen runs. He explained that the main driver behind ESG investing is to increase corporate standards which are becoming more important.
“Clients are very interested in understanding how our focus of ESG is embedded in our investment management process. The momentum behind this practice is picking up and it is only going to become more important as time goes on,” he added.
Questions were raised by audience members around how significant a challenge the added layer of complexity that the ESG policies of lenders pose to borrowers looking to post collateral for securities financing transactions.
Terry answered that collateral regarding ESG is a newer area for Aviva and that it has implemented a baseline ESG collateral screen.
“However, we have the ability to implement a more specific collateral screen should the client require it. Beneficial owners need to give their lenders clear instructions as to what companies they want to exclude,” Terry affirmed.
Short selling and its relationship with ESG also became a topic of discussion during the panel. Chessum highlighted the market had moved a long way in terms of regulating short-selling compared to 10-15 years ago and that naked short selling is banned in almost all financial markets.
“Is covered short-selling fully aligned with ESG principles? I believe that it is as it promotes price discovery and in some instances helps highlights poor corporate behaviour,” he explained.
5) Data demands
Data continues to pop-up as a popular topic at securities finance industry events, and IMN was no different. Discussing the uses of data as a beneficial owner, Allen explained that historically, lending data was primarily used for price transparency, liquidity and benchmarking.
According to Allen, until recently, most beneficial owners did not consume data directly and did not integrate securities lending data into their wider portfolio strategies, but that was changing. Today, beneficial owners require greater transparency as they transition to a more active and engaged lending programme.
A recent beneficial owner survey by DataLend and Funds Europe showed that 66 percent of beneficial owners participate in securities lending to generate alpha. Allen noted that that’s up 7 percent from their previous survey conducted in 2017.
As a result, beneficial owners are now demanding more detailed data and analytics to drive their decision making. The survey further showed that today, 81 percent of beneficial owner respondents are actively using data to manage their programme.
The panel’s moderator, Bill Foley, director of SecFinHub, asked panellists what the one piece of advice they would give beneficial owners was on how to use data.
Samir Dhrolia, vice president of global derivatives, trading and index portfolio management at British Columbia Investment Managment Corporation, commented: “If you want to make more out of the programme then you have to do more heavy lifting, and you have to become obsessed with data. There is money on the table, but it is difficult to get. Start collecting data, building tools, and embrace derivatives.”
“Beneficial owners, agent lenders and broker-dealers are all beginning to integrate securities lending data alongside other data sets,” Allen explained. “Whether it be to drive securities lending trading algorithms to optimise collateral or to use it more broadly for portfolio construction, securities lending data is being used to drive decision making.”
Allen added that it will be exciting to see lending data incorporated into artificial intelligence and machine learning algorithms, allowing market participants to apply predictive analytics to their securities lending programmes.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
