A global connection
15 October 2024
HSBC’s Adnan Hussain and Curtis Dutton sit down with Carmella Haswell to explore the bank’s efforts to form global connections, work with key emerging markets, and the importance of connectivity within securities lending
Image: stock.adobe.com/Raitalinn
Securities finance, and specifically securities lending, is a product that sits alongside clients’ core focus as an investment manager or an asset owner, says Adnan Hussain, managing director, global head of Treasury, Agency Lending and Liquidity Services at HSBC Securities Services. The requirement for the function to be seamless and not impact their core operations is a key expectation.
Hussain and his team build around the basic ethos of ensuring that the alpha driven out of a client’s portfolio is done efficiently, and ideally where there is little to no risk. Given recent events, financing and funding levels tend to be expensive and, as a result, more cash is focused on driving yield. Therefore, a large part of the dynamics in HSBC’s agency securities lending business have slowly transitioned as well in that respect.
“A big part of our focus this year was to ensure that our clients were able to continue with the newly shortened settlement cycle and, as such, still enjoy these benefits of securities lending,” notes Hussain. “Our keen focus is to drive consistency in revenue profiles through the general collateral book, ensuring efficiency in the market, and deploying a lot of the technology that we have been investing in over the last few years, so that we are able to offer these consistent returns.”
HSBC is a universal bank, therefore — in addition to the institutional asset management space that the markets business tends to be more focused on — the corporates are a huge part of who the bank services.
With interest rates where they are, and financing being relatively expensive, Hussain has seen large corporations act in a “remarkably similar” manner to institutional asset managers or owners. Here, their savings’ portfolios are becoming more asset focused, leading to securities lending opportunities.
The demand to collateralise, and perhaps to diversify clients’ cash portfolios, has led HSBC to expand its products and to be able to cater to a much broader client segment.
“It has been quite positive for the industry as a whole, because it does diversify the liquidity pools that are available. It brings a broader segment of the population to the table. Generally, it has been an interesting and changing environment that we have been able to operate within the last year or so,” notes Hussain.
From the execution perspective, HSBC has seen an increased sophistication from many clients this year. With balance sheet now key, clients increasingly recognise the funding environment and “where it is”.
In recognising the funding environment, corporates themselves are starting to look for solutions to deploy cash outside of conventional terms. These same corporations are coming to the table in the securities finance market, through HSBC’s product.
Market overview
Speaking to Securities Finance Times, Curtis Dutton, director, global head of Trading, Agency Lending and Liquidity Services at HSBC Securities Services, provides an overview of global securities finance performance over the past 12 months.
In his review, Dutton remarks that the market “has been challenging”. The tail end of the interest rate cycle in 2023 was increasing, which brought opportunities for clients in the fixed income space and repo markets. Following a peak of this interest rate curve and cycle, the same opportunity has gone amiss this year.
Another global market ‘event’ that has been influential in HSBC’s activities include the divergence in policies across central banks. For example, Japan has produced its first ever interest rate rise in 17 years. The Bank of England, Bank of Canada, Switzerland, and Sweden, are now cutting interest rates — Dutton predicts the Federal Reserve will not be far behind.
The impact of this has arguably led to uncertainty across markets, such as with the Japanese yen currency volatility earlier this year, Dutton notes. On the back of this, the VIX Volatility Index reached about 38, which is “comparable” to levels in the Greek debt crisis of 2012, he adds.
As specials are “very few and far between” this year, Dutton indicates a dip in securities finance revenues. Generally speaking, and for the market at large, these volumes are down about 17 per cent year-to-date; in Europe it has fallen almost 40 per cent; and in the US — which is historically the real “Haymaker” in the securities finance space — it is down 22 per cent.
Other notable trends include the “increasingly more important” need to find solutions and to create solutions for clients and counterparties, particularly with deploying assets in HSBC’s programme, says Dutton.
Deployment levels in some asset classes have differed between synthetic and physical. The synthetic market has widened and become more expensive, due to a number of factors such as the capital considerations for some banks. The consequence, Dutton continues, has been opportunities for banks that have balance sheet to create funding trades. For them, it has created “a long skew” on physical positions, which means on-loan values are not rising at the same pace as lendable.
Dutton states: “In the securities financing space, and for us on the physical side in particular, this year has therefore been the year of funding and balance sheet. Clearly, there is an opportunity to fund the assets that our counterparties have. But within that, there is an element of looking for solutions down that funding curve, whether that be new collateral types, new markets, or being able to indemnify — which for us, is one of the key pillars of what our clients view very strategically in this current funding world.”
Emerging markets
While HSBC’s client base presents increased engagement towards new types of products; lenders, brokers and banks are beginning to venture into the digital space.
Earlier this year, HSBC transacted the first ever funding on tokenised gold assets. Soon, the bank looks to enter into that space, from an agency perspective, with one of its strategic clients. But that goal is just the start, according to Dutton.
He says: “Gold is a fairly sensible asset to start with because it is physical, tangible, and stable. But the evolution of this digital product, as it progresses over time, is going to be a very interesting dynamic to follow — how it could stimulate increased liquidity across the market, and how it could integrate closer across global time zones.”
In addition, Dutton indicates that the business is able to help its clients with new markers, from a funding and a deployment perspective.
He continues: “We are now lending in markets within the Middle East, but are also looking at new funding and collateral types. The real benefit that we give to our clients in the agency space is universal coverage, a universal breadth of operational capabilities. But we also provide them with the strength and the stability of the HSBC balance sheet, which allows us to enter into spaces that perhaps others cannot.”
Securities lending activities contribute to a vibrant and robust marketplace, and are attracting a number of international participation and interest to the Middle East. So HSBC’s keen interest in the region comes as no surprise.
Earlier this year, HSBC opened a securities lending desk in Riyadh as a sign of intent of how strategic and important the bank sees the region in the Middle East. HSBC, including the investment bank and corporate bank, has very positive relationships in the Middle East region at large, and has local operational coverage on the ground in many of the Middle Eastern markets.
Dutton comments: “The Middle East is on the precipice of what we believe is something great. We hope to be able to offer Middle Eastern securities as a liquidity product, and liquidity in a more generic term, to a global audience, not just locally in the Middle East, not just in Europe and in Asia, but to our counterparts and partners in the Americas as well.”
HSBC began lending in Saudi Arabia, and is now seeing relatively entrenched activity around key events such as MSCI periods and corporate actions. Dutton notes that the region is “becoming a mature market”.
But it does not stop there. Dutton eagerly anticipates further advancement in other Middle Eastern markets, such as in Qatar — where HSBC transacted the “first ever” stock loan transaction a few months ago — and hopes to expand on this in the near term. Last year, the bank transacted on the Dubai Financial Market (DFM), and hopes to also expand in Dubai shortly. In addition, HSBC is speaking to regulators and looking at markets such as Kuwait.
Eager to explore more emerging markets, Dutton reveals: “It also does not end in the Middle East. Clearly, there are markets in Asia and the Asia Pacific region, such as Indonesia, that we are looking at. The potential for capital markets to take off in Indonesia is huge.”
China is another market where, if that opens, and opens in the way that Dutton expects, there could be “huge amounts of potential” for both HSBC and its clients across the all markets.
As a geographic centre that is seeing a lot of growth, Hussain highlights the Philippines as another region of interest for the team. He explains: “The Philippines market is effectively near a go-live at this point. As we see investment flows moving into these positive, very high growth geographies, certainly one of the first points of conversation becomes securities finance in general. It is not limited to equities, because where interest rates have certainly been on a significant incline, even prior to that with respect to Covid, we saw a lot of investments moving eastward.”
A lot of these emerging economies are attracting investment because of a burgeoning middle class, a significant growth rate in their local markets, according to Hussain. He says this “speaks volumes” to the fact that local investments there are increasing as well.
Saudi Arabia has one of the largest working age under 30 populations in the world, leading to a natural increase in savings, and a demand for investment products locally.
“We also see international investors looking to enter new markets, such as Saudi, and so we see demand for securities financing for those markets,” he adds. “Equally from our perspective, we are focused on the local investor and how a lending product, for example, can assist with lowering expenses and improve performance on the savings that are naturally increasing.”
With an interest in securities financing growing within the previously listed emerging markets, and more, there is a challenge in introducing this product where there are local regulations across each of these newer geographies, where participants are not as well versed.
Hussain promotes: “It is our responsibility to be able to approach the product set for these participants with a perspective of education, consistency, as well as a keen focus around ensuring that the client segments locally understand what the macro usage is, and how their investments are benefiting from the new product sets that are then becoming available.”
Connectivity
Addressing how important connectivity is in the securities lending sector, Hussain recalls the firm’s ethos, to connect both “east to west and west to east”.
In that respect, the firm says it has a unique position in what might be considered as emerging or developing markets. But also, this brings a responsibility to ensure HSBC is offering a global solution set to the local markets.
In order to do this, Hussain says consistency and a physical presence is key, which is “effectively the relationship we have with regulators locally, the trust that has been built in that respect over the years”. But, primarily, because of the newer nature of the industry, Dutton believes that many of these markets tend to be segregated, and so have become operationally more intensive.
On one side of the business, the firm is a huge network provider to banks and broker dealers globally, global custodians included. The other side is where HSBC provides global custody and access to investors, asset managers, and asset owners in the process. Hussain explains: “We have made a very conscious effort to look across both of those business segments to offer a holistic solution set, appreciating that a lot of the time, the flow is from one side to the other.”
A holistic view and focus on an end-to-end flow, with a primary ambition to ensure it is maintaining operational efficiency and excellence through the process, has been a large part of Hussain’s work. One of the steps that he took was bringing treasury and securities lending together.
Within emerging markets specifically, he believes there is more need to provide that holistic approach. The segregated nature of the assets, the restricted nature of a lot of the currencies, the bespoke nature of some of the regulations that are then omnipresent as well. In all cases, Hussain says regulations are always changing, but in many cases in some of the emerging markets, they are relatively new regulations. “Therefore, working closely with ensuring that the depositories, the regulators, the broader base within these local markets, are feeling comfortable about new financing products, is a big part of our focus,” he confirms.
Dutton interjects: “From an execution side, what Adnan has been able to achieve in bringing together treasury and securities lending, has certainly been incredibly powerful. The sophistication level of our clients now is such that they see the idea very acutely, that they are both liquidity takers and liquidity providers.
“What our clients are looking for is a liquidity partner, to deploy liquidity where they see it fit and to raise liquidity where they see it fit. Having a holistic view of both treasury and securities lending gives us a very unique view of how we can achieve that.”
With regards to Hussain’s point on the global operations HSBC has and on-ground presence in local markets, Dutton says this should “be felt very acutely” in the Americas also.
“Yes, we are not the largest custodian in America, but it is absolutely our view that we have a global programme with global connectivity, whether it is the Middle East, Europe, Asia or the Americas. We want to allow access to local liquidity to all our institutional partners globally,” Dutton notes.
Core priorities
Bringing the discussion to a close, Hussain and Dutton review the key priorities for HSBC’s development strategy, and what the bank has coming up in the pipeline.
From a trading perspective, Hussain sees the business not just as a securities lending business or a treasury business, but as a liquidity provider generally.
“Enabling my teams to be able to have a holistic approach across broader products is a huge part of my priority,” he adds. “There are a lot of new tools available from a financing perspective — including the principal approach, the synthetic, a CCP, collateral pledge, tokenisation — it is a big part of our focus to provide credible solution sets across a broad base.”
In terms of aspiration, and what Hussain would like to achieve over the next year, is seamlessness across what would be considered, traditionally, as treasury and securities finance. In addition, he is eager to see the advent of tokenisation become more mainstream.
He explains: “Now that the proof of concept has really been able to get crossed, we want to do things in a more calculated way. The mystery or demystification around how settlement works with a token can naturally be answered, and a natural increase of usage will lead to efficiency and greater access.”
Overall, to progress the product sets and focus on client’s needs and solutions that they desire in that respect, is the core part of Hussain’s focus.
In conclusion, and from an executive perspective, Dutton’s core priority will be to continue to evolve HSBC’s sophistication in line with its clients, whether that be sophistication in operations, technology, personnel, or sophistication in approach and mentality. He adds: “Ultimately, our clients are evolving in their sophistication and it is incumbent on us to evolve with them.”
Hussain and his team build around the basic ethos of ensuring that the alpha driven out of a client’s portfolio is done efficiently, and ideally where there is little to no risk. Given recent events, financing and funding levels tend to be expensive and, as a result, more cash is focused on driving yield. Therefore, a large part of the dynamics in HSBC’s agency securities lending business have slowly transitioned as well in that respect.
“A big part of our focus this year was to ensure that our clients were able to continue with the newly shortened settlement cycle and, as such, still enjoy these benefits of securities lending,” notes Hussain. “Our keen focus is to drive consistency in revenue profiles through the general collateral book, ensuring efficiency in the market, and deploying a lot of the technology that we have been investing in over the last few years, so that we are able to offer these consistent returns.”
HSBC is a universal bank, therefore — in addition to the institutional asset management space that the markets business tends to be more focused on — the corporates are a huge part of who the bank services.
With interest rates where they are, and financing being relatively expensive, Hussain has seen large corporations act in a “remarkably similar” manner to institutional asset managers or owners. Here, their savings’ portfolios are becoming more asset focused, leading to securities lending opportunities.
The demand to collateralise, and perhaps to diversify clients’ cash portfolios, has led HSBC to expand its products and to be able to cater to a much broader client segment.
“It has been quite positive for the industry as a whole, because it does diversify the liquidity pools that are available. It brings a broader segment of the population to the table. Generally, it has been an interesting and changing environment that we have been able to operate within the last year or so,” notes Hussain.
From the execution perspective, HSBC has seen an increased sophistication from many clients this year. With balance sheet now key, clients increasingly recognise the funding environment and “where it is”.
In recognising the funding environment, corporates themselves are starting to look for solutions to deploy cash outside of conventional terms. These same corporations are coming to the table in the securities finance market, through HSBC’s product.
Market overview
Speaking to Securities Finance Times, Curtis Dutton, director, global head of Trading, Agency Lending and Liquidity Services at HSBC Securities Services, provides an overview of global securities finance performance over the past 12 months.
In his review, Dutton remarks that the market “has been challenging”. The tail end of the interest rate cycle in 2023 was increasing, which brought opportunities for clients in the fixed income space and repo markets. Following a peak of this interest rate curve and cycle, the same opportunity has gone amiss this year.
Another global market ‘event’ that has been influential in HSBC’s activities include the divergence in policies across central banks. For example, Japan has produced its first ever interest rate rise in 17 years. The Bank of England, Bank of Canada, Switzerland, and Sweden, are now cutting interest rates — Dutton predicts the Federal Reserve will not be far behind.
The impact of this has arguably led to uncertainty across markets, such as with the Japanese yen currency volatility earlier this year, Dutton notes. On the back of this, the VIX Volatility Index reached about 38, which is “comparable” to levels in the Greek debt crisis of 2012, he adds.
As specials are “very few and far between” this year, Dutton indicates a dip in securities finance revenues. Generally speaking, and for the market at large, these volumes are down about 17 per cent year-to-date; in Europe it has fallen almost 40 per cent; and in the US — which is historically the real “Haymaker” in the securities finance space — it is down 22 per cent.
Other notable trends include the “increasingly more important” need to find solutions and to create solutions for clients and counterparties, particularly with deploying assets in HSBC’s programme, says Dutton.
Deployment levels in some asset classes have differed between synthetic and physical. The synthetic market has widened and become more expensive, due to a number of factors such as the capital considerations for some banks. The consequence, Dutton continues, has been opportunities for banks that have balance sheet to create funding trades. For them, it has created “a long skew” on physical positions, which means on-loan values are not rising at the same pace as lendable.
Dutton states: “In the securities financing space, and for us on the physical side in particular, this year has therefore been the year of funding and balance sheet. Clearly, there is an opportunity to fund the assets that our counterparties have. But within that, there is an element of looking for solutions down that funding curve, whether that be new collateral types, new markets, or being able to indemnify — which for us, is one of the key pillars of what our clients view very strategically in this current funding world.”
Emerging markets
While HSBC’s client base presents increased engagement towards new types of products; lenders, brokers and banks are beginning to venture into the digital space.
Earlier this year, HSBC transacted the first ever funding on tokenised gold assets. Soon, the bank looks to enter into that space, from an agency perspective, with one of its strategic clients. But that goal is just the start, according to Dutton.
He says: “Gold is a fairly sensible asset to start with because it is physical, tangible, and stable. But the evolution of this digital product, as it progresses over time, is going to be a very interesting dynamic to follow — how it could stimulate increased liquidity across the market, and how it could integrate closer across global time zones.”
In addition, Dutton indicates that the business is able to help its clients with new markers, from a funding and a deployment perspective.
He continues: “We are now lending in markets within the Middle East, but are also looking at new funding and collateral types. The real benefit that we give to our clients in the agency space is universal coverage, a universal breadth of operational capabilities. But we also provide them with the strength and the stability of the HSBC balance sheet, which allows us to enter into spaces that perhaps others cannot.”
Securities lending activities contribute to a vibrant and robust marketplace, and are attracting a number of international participation and interest to the Middle East. So HSBC’s keen interest in the region comes as no surprise.
Earlier this year, HSBC opened a securities lending desk in Riyadh as a sign of intent of how strategic and important the bank sees the region in the Middle East. HSBC, including the investment bank and corporate bank, has very positive relationships in the Middle East region at large, and has local operational coverage on the ground in many of the Middle Eastern markets.
Dutton comments: “The Middle East is on the precipice of what we believe is something great. We hope to be able to offer Middle Eastern securities as a liquidity product, and liquidity in a more generic term, to a global audience, not just locally in the Middle East, not just in Europe and in Asia, but to our counterparts and partners in the Americas as well.”
HSBC began lending in Saudi Arabia, and is now seeing relatively entrenched activity around key events such as MSCI periods and corporate actions. Dutton notes that the region is “becoming a mature market”.
But it does not stop there. Dutton eagerly anticipates further advancement in other Middle Eastern markets, such as in Qatar — where HSBC transacted the “first ever” stock loan transaction a few months ago — and hopes to expand on this in the near term. Last year, the bank transacted on the Dubai Financial Market (DFM), and hopes to also expand in Dubai shortly. In addition, HSBC is speaking to regulators and looking at markets such as Kuwait.
Eager to explore more emerging markets, Dutton reveals: “It also does not end in the Middle East. Clearly, there are markets in Asia and the Asia Pacific region, such as Indonesia, that we are looking at. The potential for capital markets to take off in Indonesia is huge.”
China is another market where, if that opens, and opens in the way that Dutton expects, there could be “huge amounts of potential” for both HSBC and its clients across the all markets.
As a geographic centre that is seeing a lot of growth, Hussain highlights the Philippines as another region of interest for the team. He explains: “The Philippines market is effectively near a go-live at this point. As we see investment flows moving into these positive, very high growth geographies, certainly one of the first points of conversation becomes securities finance in general. It is not limited to equities, because where interest rates have certainly been on a significant incline, even prior to that with respect to Covid, we saw a lot of investments moving eastward.”
A lot of these emerging economies are attracting investment because of a burgeoning middle class, a significant growth rate in their local markets, according to Hussain. He says this “speaks volumes” to the fact that local investments there are increasing as well.
Saudi Arabia has one of the largest working age under 30 populations in the world, leading to a natural increase in savings, and a demand for investment products locally.
“We also see international investors looking to enter new markets, such as Saudi, and so we see demand for securities financing for those markets,” he adds. “Equally from our perspective, we are focused on the local investor and how a lending product, for example, can assist with lowering expenses and improve performance on the savings that are naturally increasing.”
With an interest in securities financing growing within the previously listed emerging markets, and more, there is a challenge in introducing this product where there are local regulations across each of these newer geographies, where participants are not as well versed.
Hussain promotes: “It is our responsibility to be able to approach the product set for these participants with a perspective of education, consistency, as well as a keen focus around ensuring that the client segments locally understand what the macro usage is, and how their investments are benefiting from the new product sets that are then becoming available.”
Connectivity
Addressing how important connectivity is in the securities lending sector, Hussain recalls the firm’s ethos, to connect both “east to west and west to east”.
In that respect, the firm says it has a unique position in what might be considered as emerging or developing markets. But also, this brings a responsibility to ensure HSBC is offering a global solution set to the local markets.
In order to do this, Hussain says consistency and a physical presence is key, which is “effectively the relationship we have with regulators locally, the trust that has been built in that respect over the years”. But, primarily, because of the newer nature of the industry, Dutton believes that many of these markets tend to be segregated, and so have become operationally more intensive.
On one side of the business, the firm is a huge network provider to banks and broker dealers globally, global custodians included. The other side is where HSBC provides global custody and access to investors, asset managers, and asset owners in the process. Hussain explains: “We have made a very conscious effort to look across both of those business segments to offer a holistic solution set, appreciating that a lot of the time, the flow is from one side to the other.”
A holistic view and focus on an end-to-end flow, with a primary ambition to ensure it is maintaining operational efficiency and excellence through the process, has been a large part of Hussain’s work. One of the steps that he took was bringing treasury and securities lending together.
Within emerging markets specifically, he believes there is more need to provide that holistic approach. The segregated nature of the assets, the restricted nature of a lot of the currencies, the bespoke nature of some of the regulations that are then omnipresent as well. In all cases, Hussain says regulations are always changing, but in many cases in some of the emerging markets, they are relatively new regulations. “Therefore, working closely with ensuring that the depositories, the regulators, the broader base within these local markets, are feeling comfortable about new financing products, is a big part of our focus,” he confirms.
Dutton interjects: “From an execution side, what Adnan has been able to achieve in bringing together treasury and securities lending, has certainly been incredibly powerful. The sophistication level of our clients now is such that they see the idea very acutely, that they are both liquidity takers and liquidity providers.
“What our clients are looking for is a liquidity partner, to deploy liquidity where they see it fit and to raise liquidity where they see it fit. Having a holistic view of both treasury and securities lending gives us a very unique view of how we can achieve that.”
With regards to Hussain’s point on the global operations HSBC has and on-ground presence in local markets, Dutton says this should “be felt very acutely” in the Americas also.
“Yes, we are not the largest custodian in America, but it is absolutely our view that we have a global programme with global connectivity, whether it is the Middle East, Europe, Asia or the Americas. We want to allow access to local liquidity to all our institutional partners globally,” Dutton notes.
Core priorities
Bringing the discussion to a close, Hussain and Dutton review the key priorities for HSBC’s development strategy, and what the bank has coming up in the pipeline.
From a trading perspective, Hussain sees the business not just as a securities lending business or a treasury business, but as a liquidity provider generally.
“Enabling my teams to be able to have a holistic approach across broader products is a huge part of my priority,” he adds. “There are a lot of new tools available from a financing perspective — including the principal approach, the synthetic, a CCP, collateral pledge, tokenisation — it is a big part of our focus to provide credible solution sets across a broad base.”
In terms of aspiration, and what Hussain would like to achieve over the next year, is seamlessness across what would be considered, traditionally, as treasury and securities finance. In addition, he is eager to see the advent of tokenisation become more mainstream.
He explains: “Now that the proof of concept has really been able to get crossed, we want to do things in a more calculated way. The mystery or demystification around how settlement works with a token can naturally be answered, and a natural increase of usage will lead to efficiency and greater access.”
Overall, to progress the product sets and focus on client’s needs and solutions that they desire in that respect, is the core part of Hussain’s focus.
In conclusion, and from an executive perspective, Dutton’s core priority will be to continue to evolve HSBC’s sophistication in line with its clients, whether that be sophistication in operations, technology, personnel, or sophistication in approach and mentality. He adds: “Ultimately, our clients are evolving in their sophistication and it is incumbent on us to evolve with them.”
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