A close second
27 May 2014
CASLA’s 4th annual conference highlighted the strengths of the world’s second most important securities lending market—and participants’ ongoing efforts to keep building for the future
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The Canadian Securities Lending Association (CASLA) welcomed more than 170 local and international agent lenders, borrowers, regulators and other industry stakeholders at its fourth annual conference in Toronto on 8 May. The event has become the preeminent industry gathering for Canadian securities lending market participants, and this year measured up to all expectations.
Rob Ferguson, president of CASLA and senior vice president of capital markets and product delivery at CIBC Mellon, welcomed attendees with a preview of the day’s themes, highlighting CASLA’s ongoing work with regulators and other market participants to foster understanding of securities lending market practices; the challenges associated with global regulatory expansion; and the impacts of central counterparty settlement. Ferguson took great care to contrast the well-earned global acclaim for Canada’s financial services sector with the perennial underperformance of Toronto Maple Leafs’s ice hockey team, as well as crack a few jokes at the expense of the infamous Mayor Rob Ford.
Chris Benedict of DataLend was likewise unable to resist a few “poke checks” at the local hockey squad before turning to a well-received analysis of the Canadian securities lending market. As of Benedict’s 23 April snapshot, Canada has very strong participation in securities lending, with CAD$73 billion of equities, CAD$10 billion of corporate debt, and CAD$80 billion of sovereign and other debt on loan. These figures make Canada the world’s second largest securities lending market, ahead of Germany (third) and the UK (fourth).
In addition to the big picture, Benedict took participants through a deeper dive into movers in the Canadian market, such as BlackBerry, Loblaw/Shoppers Drug Mart and Telus. Benedict also contrasted Canada’s primarily general collateral fee bands with more seasonal markets in Europe, as well as the supply issues that have driven higher fee bands in Asia.
Regulation—a central theme for CASLA conference participants and players around the world—was the topic of the first panel, featuring moderator Christopher Steeves of law firm Fasken Martineau DuMoulin LLP, along with Lesley Charkow of RBC Investor & Treasury Services, Michael McAuley of BNY Mellon and William Young of State Street. Charkow, who also chairs CASLA’s legal and regulatory subcommittee, highlighted the group’s work over the last year “to demystify securities lending to the regulators ... highlighting, educating and fostering understanding to help the regulators continue to find appropriate balance ... understand which information is relevant, and collect the right information”.
The regulatory panel members devoted substantial time to the challenges associated with greatly expanded disclosure requirements under the Foreign Account Tax Compliance Act (FATCA). For an example, the panel cited the case of Canada-US dual citizens, where FATCA rules require various disclosures to the Internal Revenue Services, while Canadian privacy laws prevent those disclosures.
Back by popular demand after its introduction at the 2013 CASLA conference, the hedge fund panel was moderated by Les Marton of Scotia Capital and featured Anthony Venditti of BMO Capital Markets, Daniel Dorenbush of Scotiabank, Colin Stewart of JC Clark and Nick Neary of Polar Securities. Given that Canadian hedge funds as borrowers drive up to half of Canadian securities lending activity, there was understandable interest in the hedge fund managers’ views. Panellists underscored the importance of cross-border securities lending activity, given that the smaller size of the Canadian market and more restricted liquidity can make it difficult to hedge against small cap companies, meaning Canadian managers often hedge against US sectors.
Panellists expressed frustration that many non-Canadians underestimate the size and sophistication of the Canadian hedge fund industry, while taking some pride in the growing acceptability of hedging strategies among institutional investors. The panel noted that hedge funds are tapping asset servicing providers for back-office infrastructure to satisfy the risk and reporting needs of pension plans and other conservative institutional investors.
Vendetti cited the trust that Canada’s big banks bring to the hedge fund equation, providing funds with start-up funds and offering security and confidence through their prime brokers. He also noted that Canadian banks have been “much better at protecting their turf than places like Japan, where US banks have come in and taken a lot of market share”. Conversely, Venditti also suggested that Canadian banks could get better at retail distribution, helping hedge funds sell through their investment advisors.
In response to a question from CIBC Mellon’s Rob Ferguson about what agent lenders could do better, panellists praised Canada’s securities lending industry as “mature, sophisticated and responsive”, before expressing a desire to see even more pension funds participate, meaning greater liquidity. There was also hope that beneficial owners would express greater openness to high-volume, low-fee trades, versus focusing exclusively on small-volume trades with high per-unit costs.
Next up was the fixed income panel featuring Charles Lesaux of RBC Capital Markets, Chris Tigert of BNY Mellon, Steve Novo of State Street and Jeffrey Benner of Northern Trust. Tigert noted that Canadian market participants are taking a characteristic “wait and see” approach when it comes to using evergreen structures to secure some capital relief, which has depressed demand. “This has in turn contributed to increases on the cash collateral market, as players leverage cash reserves to underpin securities lending activities.”
Panel moderator Nick Chan of BMO Capital Markets echoed this point, noting that “Canadian banks are run conservatively, with capital ratios well in advance of Basel requirements”, and pointed out that over time, Canadian institutions will likely respond to market pressures and move to structures that deliver funding in line with leverage ratios and the cost of capital.
Lesaux highlighted Canadian banks’ push to participate in central clearing of repo trades, which would help mitigate risks, improve liquidity, provide netting benefits and reduce balance sheet usage—although concern remained around being unable to choose counterparties.
Novo said that Canadian supply remains extremely tight: “The global supply of AAA-rated bonds is down 60 per cent since 2007, and for the first time ever there are more AA-rated sovereign bonds than AAA-rated bonds.” Strong demand is compounded by the limited supply: the Bank of Canada retains 20 percent of every bond issue, the Canadian dollar remains one of the International Monetary Fund’s seven official reserve currencies, and a move to staggered maturities from twice-yearly maturities meant additional constraints. As a result, 14 percent of Canadian bonds are trading special. Novo noted that as the Canadian economy picks up and the Canadian government moves to surplus budget territory, this could lead to fewer bond issues and further supply constriction.
The final panel of the day focused on equity, with Rob Dias of Bank of America Merrill Lynch moderating Steve Schneider of Morgan Stanley, Daniel Yardin of BNY Mellon, John Whiting of State Street, Brendan Eccles of Scotiabank GBM and Paul Larkin of CIBC World Markets. The panellists agreed that Canada is probably at an inflection point for the lending of equities, with the significantly increased costs associated with complying with expanded regulatory requirements and a move toward finding a new balance in terms of capital usage constraints. The forecast is for higher rates, a continued move toward cash collateral, and expanded collateral costs.
As one panellist noted: “Risk based capital requirements have a significant impact. It’s a natural evolution of the securities lending market. Collateral wasn’t always properly priced in the past, but now it is being much more accurately priced in.”
Time and costs are associated with complying with more complex regulatory requirements, which means additional overhead and increased costs—all of which need to be accounted for when considering whether a given activity makes sense. Forecasting the future, panellists expected greater focus on seeking balance sheet friendly trades, such as equity-for-equity trades for equity, etc, in order to keep up with new Basel requirements.
Yardin pointed to several impacts from Europe, including expanded regulatory requirements increasing costs, while tax harmonisation meant softening some demand. He also noted the prospective EU Financial Transaction Tax—currently proposed at 10 basis points—could significantly impact securities lending.
Some time was given over to considering the current state of the market. The Canadian market saw a significant volume of share buybacks in 2013, which are dwindling in favour of expected M&A activity in 2014 as companies begin to have the confidence to deploy their capital on acquisitions.
Canadian beneficial owners face some restrictions on collateral. Canadian regulations do not permit mutual funds to accept equities as collateral, and they can only reinvest cash collateral out to 30 days. As a result, CASLA and other stakeholders are lobbying the regulators to level the playing field between mutual funds and other funds.
Future growth opportunities include Canadian participants expanding into new markets (particularly in Asia) and encouraging more owners to participate in lending. Areas of potential challenge include Basel requirements that may preclude or substantially raise the costs associated with offering indemnification for owners, as well as the big change of moving to a central clearing market.
The 2014 CASLA conference was very successful in bringing a range stakeholders in the Canadian securities lending industry together. The panels were lively and interesting, and the discussions and networking successful. The post-event festivities were excellent as expected.
Rob Ferguson, president of CASLA and senior vice president of capital markets and product delivery at CIBC Mellon, welcomed attendees with a preview of the day’s themes, highlighting CASLA’s ongoing work with regulators and other market participants to foster understanding of securities lending market practices; the challenges associated with global regulatory expansion; and the impacts of central counterparty settlement. Ferguson took great care to contrast the well-earned global acclaim for Canada’s financial services sector with the perennial underperformance of Toronto Maple Leafs’s ice hockey team, as well as crack a few jokes at the expense of the infamous Mayor Rob Ford.
Chris Benedict of DataLend was likewise unable to resist a few “poke checks” at the local hockey squad before turning to a well-received analysis of the Canadian securities lending market. As of Benedict’s 23 April snapshot, Canada has very strong participation in securities lending, with CAD$73 billion of equities, CAD$10 billion of corporate debt, and CAD$80 billion of sovereign and other debt on loan. These figures make Canada the world’s second largest securities lending market, ahead of Germany (third) and the UK (fourth).
In addition to the big picture, Benedict took participants through a deeper dive into movers in the Canadian market, such as BlackBerry, Loblaw/Shoppers Drug Mart and Telus. Benedict also contrasted Canada’s primarily general collateral fee bands with more seasonal markets in Europe, as well as the supply issues that have driven higher fee bands in Asia.
Regulation—a central theme for CASLA conference participants and players around the world—was the topic of the first panel, featuring moderator Christopher Steeves of law firm Fasken Martineau DuMoulin LLP, along with Lesley Charkow of RBC Investor & Treasury Services, Michael McAuley of BNY Mellon and William Young of State Street. Charkow, who also chairs CASLA’s legal and regulatory subcommittee, highlighted the group’s work over the last year “to demystify securities lending to the regulators ... highlighting, educating and fostering understanding to help the regulators continue to find appropriate balance ... understand which information is relevant, and collect the right information”.
The regulatory panel members devoted substantial time to the challenges associated with greatly expanded disclosure requirements under the Foreign Account Tax Compliance Act (FATCA). For an example, the panel cited the case of Canada-US dual citizens, where FATCA rules require various disclosures to the Internal Revenue Services, while Canadian privacy laws prevent those disclosures.
Back by popular demand after its introduction at the 2013 CASLA conference, the hedge fund panel was moderated by Les Marton of Scotia Capital and featured Anthony Venditti of BMO Capital Markets, Daniel Dorenbush of Scotiabank, Colin Stewart of JC Clark and Nick Neary of Polar Securities. Given that Canadian hedge funds as borrowers drive up to half of Canadian securities lending activity, there was understandable interest in the hedge fund managers’ views. Panellists underscored the importance of cross-border securities lending activity, given that the smaller size of the Canadian market and more restricted liquidity can make it difficult to hedge against small cap companies, meaning Canadian managers often hedge against US sectors.
Panellists expressed frustration that many non-Canadians underestimate the size and sophistication of the Canadian hedge fund industry, while taking some pride in the growing acceptability of hedging strategies among institutional investors. The panel noted that hedge funds are tapping asset servicing providers for back-office infrastructure to satisfy the risk and reporting needs of pension plans and other conservative institutional investors.
Vendetti cited the trust that Canada’s big banks bring to the hedge fund equation, providing funds with start-up funds and offering security and confidence through their prime brokers. He also noted that Canadian banks have been “much better at protecting their turf than places like Japan, where US banks have come in and taken a lot of market share”. Conversely, Venditti also suggested that Canadian banks could get better at retail distribution, helping hedge funds sell through their investment advisors.
In response to a question from CIBC Mellon’s Rob Ferguson about what agent lenders could do better, panellists praised Canada’s securities lending industry as “mature, sophisticated and responsive”, before expressing a desire to see even more pension funds participate, meaning greater liquidity. There was also hope that beneficial owners would express greater openness to high-volume, low-fee trades, versus focusing exclusively on small-volume trades with high per-unit costs.
Next up was the fixed income panel featuring Charles Lesaux of RBC Capital Markets, Chris Tigert of BNY Mellon, Steve Novo of State Street and Jeffrey Benner of Northern Trust. Tigert noted that Canadian market participants are taking a characteristic “wait and see” approach when it comes to using evergreen structures to secure some capital relief, which has depressed demand. “This has in turn contributed to increases on the cash collateral market, as players leverage cash reserves to underpin securities lending activities.”
Panel moderator Nick Chan of BMO Capital Markets echoed this point, noting that “Canadian banks are run conservatively, with capital ratios well in advance of Basel requirements”, and pointed out that over time, Canadian institutions will likely respond to market pressures and move to structures that deliver funding in line with leverage ratios and the cost of capital.
Lesaux highlighted Canadian banks’ push to participate in central clearing of repo trades, which would help mitigate risks, improve liquidity, provide netting benefits and reduce balance sheet usage—although concern remained around being unable to choose counterparties.
Novo said that Canadian supply remains extremely tight: “The global supply of AAA-rated bonds is down 60 per cent since 2007, and for the first time ever there are more AA-rated sovereign bonds than AAA-rated bonds.” Strong demand is compounded by the limited supply: the Bank of Canada retains 20 percent of every bond issue, the Canadian dollar remains one of the International Monetary Fund’s seven official reserve currencies, and a move to staggered maturities from twice-yearly maturities meant additional constraints. As a result, 14 percent of Canadian bonds are trading special. Novo noted that as the Canadian economy picks up and the Canadian government moves to surplus budget territory, this could lead to fewer bond issues and further supply constriction.
The final panel of the day focused on equity, with Rob Dias of Bank of America Merrill Lynch moderating Steve Schneider of Morgan Stanley, Daniel Yardin of BNY Mellon, John Whiting of State Street, Brendan Eccles of Scotiabank GBM and Paul Larkin of CIBC World Markets. The panellists agreed that Canada is probably at an inflection point for the lending of equities, with the significantly increased costs associated with complying with expanded regulatory requirements and a move toward finding a new balance in terms of capital usage constraints. The forecast is for higher rates, a continued move toward cash collateral, and expanded collateral costs.
As one panellist noted: “Risk based capital requirements have a significant impact. It’s a natural evolution of the securities lending market. Collateral wasn’t always properly priced in the past, but now it is being much more accurately priced in.”
Time and costs are associated with complying with more complex regulatory requirements, which means additional overhead and increased costs—all of which need to be accounted for when considering whether a given activity makes sense. Forecasting the future, panellists expected greater focus on seeking balance sheet friendly trades, such as equity-for-equity trades for equity, etc, in order to keep up with new Basel requirements.
Yardin pointed to several impacts from Europe, including expanded regulatory requirements increasing costs, while tax harmonisation meant softening some demand. He also noted the prospective EU Financial Transaction Tax—currently proposed at 10 basis points—could significantly impact securities lending.
Some time was given over to considering the current state of the market. The Canadian market saw a significant volume of share buybacks in 2013, which are dwindling in favour of expected M&A activity in 2014 as companies begin to have the confidence to deploy their capital on acquisitions.
Canadian beneficial owners face some restrictions on collateral. Canadian regulations do not permit mutual funds to accept equities as collateral, and they can only reinvest cash collateral out to 30 days. As a result, CASLA and other stakeholders are lobbying the regulators to level the playing field between mutual funds and other funds.
Future growth opportunities include Canadian participants expanding into new markets (particularly in Asia) and encouraging more owners to participate in lending. Areas of potential challenge include Basel requirements that may preclude or substantially raise the costs associated with offering indemnification for owners, as well as the big change of moving to a central clearing market.
The 2014 CASLA conference was very successful in bringing a range stakeholders in the Canadian securities lending industry together. The panels were lively and interesting, and the discussions and networking successful. The post-event festivities were excellent as expected.
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