Canada fared comparatively well in the global credit crisis, and most point to the countrys sound regulatory policies for maintaining more or less business as usual when other markets were in chaos. Service providers are seeing growth in custody, prime brokerage and especially securities lending, although asset values have dropped recently in line with global exchanges. Meanwhile, the Toronto Stock Exchange is weighing a bid by a group of Canadian banks and pensions to take over the countrys largest exchange after the London Stock Exchange failed in its attempt to buy TSX.
Global Custodian spoke to Rob Wright, global head of Product & Client Segments at RBC Dexia, and Tom Monahan, president and CEO of CIBC Mellon representing the two domestic Canadian custodians about the trends affecting Canadian securities service providers and their clients the most.
At the tail end of the crisis, custodians and prime brokers in Canada benefited from the markets perceived safety with ample new business. Has that trend continued?
Wright: Canada fared well during the recent crisis specifically due to the stringent regulatory environment other countries seem to be currently striving for. Our growth model relies on organic growth, and we will continue to win business and grow out of our ability to leverage onshore and offshore capability. The real and perceived financial safety of Canada helps solidify our reputation globally, but locally, our market success is due to the strength of our operating and client service model.
Monahan: Yes. Canada and its financial markets continue to be recognized around the world for strength and stability. Thanks to prudent regulation, historically high commodity prices, and strong fiscal and monetary policies, Canada continues to attract significant foreign investment. Canadas employment rate has increased steadily since mid-2009, our budgetary position is among the worlds strongest, and our government retains its triple-A credit rating. Our strength and stability are particularly appealing to investors given the challenges facing the US, eurozone and elsewhere. We are of course a trading nation and subject to the global economic environment, so fallout from difficulties with sovereign debt or the US credit rating downgrade remains a concern. Our economic fundamentals remain strong, however, so I am confident that we are well positioned to continue to perform very well relative to other developed economies.
The securities lending industry has been burgeoning in recent years. Has anything new transpired there, and does it remain on this growth path?
Wright: The Canadian market continues to be a strong securities lending market. Like all markets there are challenges stemming from the current US and European debt crisis; however, the Canadian market continues to be more conservative and risk averse than other markets, and has weathered the global economic downturns successfully. Despite these challenges we have seen [a] majority of lenders who had previous[ly] temporarily suspended their lending programs during the financial crisis return to securities lending with RBC Dexia after reconsidering the program models that most suit their risk-reward profile. In addition, there are new mandates still coming to market.
We work closely with clients to educate them on the different models and tailor securities lending programs to match their profile. We have done this successfully in the past and will continue to do so in the future. The demand and supply dynamics have changed globally, and Canada is not immune to this. We are unlikely to see the volumes of 2007-08 in the near future, but current trade and M&A activity is a good indicator of a positive outlook.
Monahan: Recent economic instability notwithstanding, the Canadian lending market continues to be on a growth trajectory. In addition to the macroeconomic factors which are driving Canadas strong economic performance relative to other developed economies, growth in the lending market is being driven by increased merger and acquisition activity, ongoing strong performance in fixed income lending and a sizable influx of investment cash. A number of players had been building up significant reserves, which had been kept aside since 2008, but these investors and institutions are beginning to put their reserves into action. Equity lending volumes have been decent, and we are beginning to see more activity around specials (high-demand securities that command premium rates) in US and Canadian markets, which is good for client revenues. As of the end of 2010, the Canadian market had more than a trillion Canadian dollars of securities available for lending. The market remains very healthy, with participants maintaining a good balance of focus between risk and return. With the usual caveat that markets are closely interconnected and Canadas markets are not immune to global headwinds, we remain optimistic about the lending market in the year ahead.
We have also seen the Canadian Securities Lending Association (CASLA) grow significantly in stature. CASLA continues to provide a forum for the industry to exchange information with regulators and encourage best practices across the industry. CASLA held its first conference on securities lending in Canada earlier in 2011, which was very successful, and I know the organization is looking forward to its 2012 conference. We are a proud founding member of the organization, and we continue to work closely with CASLA to advance the securities lending industry among participants, regulators and the public.
The London Stock Exchange failed in its bid for the Toronto Stock Exchange. Why were shareholders uninterested in consummating the merger? Is the partnership of domestic institutions making up the Maple Group a more viable acquirer? Has this ongoing saga impacted the market any?
Wright: While we followed this story closely along with everyone else in Canada, this is not something we have a position on, and we would monitor any impact of the eventual sale on the marketplace as it relates to how best we service our clients.
Monahan: I think the Maple Group trumped the LSE bid for a few reasons, but I would point to the superior valuation offered by Maple as well as shareholders trust in the combined strength of Maples 13 partner institutions. The viability of the deal ultimately rests with the regulators at this point; the Maple group is currently pursuing regulatory approval against a September 30 deadline though Maple has indicated they will extend this deadline if necessary.
A TMX/Maple merger would be positive for our industry, as it would bring efficiencies such as the opportunity to consolidate clearing houses for securities and derivatives. This would bring a number of benefits, including increased trading volumes through cross-margining, such as a simplified interface between custodians and the consolidated clearinghouse, and opportunities to post a wider variety of collateral for derivatives trades.
I would say that most participants remain optimistic that the Maple merger and its associated benefits will come to fruition. The participants are waiting for the regulators decision, and attention is generally focused elsewhere right now, so there probably isnt a big impact to the market at the moment.
(CG)