At the IMN 20th Annual Beneficial Owners’ International Securities Lending Conference in Austin, Texas, the general consensus seems to be that the challenging environment of 2013 will continue in 2014, albeit with a slight improvement.
While regulation and economic factors will still affect the industry, certain conditions from 2013 will most likely change for the better.
“As we look at 2014, we think it will be similar to 2013 but perhaps not as subdued, and we hope it will have a few more positives,” said Paul Wilson, global head of agent lending product and portfolio analysis at J.P. Morgan.
For example, the exceptionally strong equities performance last year affected short selling activity, and with the markets unlike to match these levels in 2014, more short selling opportunities should emerge, thus increasing borrowing levels. Also, the low interest rate environment and the high level of liquidity due to quantitative easing played a role in suppressing securities lending activity. This year, the Federal Reserve’s tapering should be a plus for securities lending.
Another potential positive could actually be a result of regulation, whereas increased collateral demands could spark demand for collateral transformation through securities lending, but Wilson believes this process will only help the industry so much.
“It is muted that collateral transformation may be the next big growth item for securities lending, but we don’t really see it that way,” he says. “We feel it may be positive, but not the saving grace. So I think it will be much the same from a market perspective.”
While activity and revenue is unlikely to change compared to recent years, the advances in technology have been substantial and will continue to improve in 2014.
“What’s been really interesting is looking at the last 20 years, you could make a strong case that the foundation [of securities lending] has not really changed…What really has changed is the availability of data. So that’s really driven benchmarking, smarter trading, and the market is much more transparent than it used to be,” said James Templeman, managing director at BlackRock.
This technology has also affected the way beneficial owners evaluate their programs.
“We have fewer conversations with beneficial owners about absolute levels of return,” said Wilson. “I think that’s for two reasons. Firstly, there’s been a general improvement over the last five years in transparency, reporting and analytics on how revenue has been generated. Secondly, beneficial owners are willing to settle for a slightly lower level of income than they have previously, in return for a better managed and tighter controlled program.”
Mark Payson, global head of business development at Brown Brothers Harriman had a similar viewpoint in giving this advice: “Going forward for beneficial owners, one of the things to work on is thinking about value in relative terms…I think the market has enough transparency that you can see if you’re outperforming the industry, rather than trying to outperform your prior years.”
One of the providers of this increased securities finance data, SunGard’s Astec Analytics, shared data at the conference showing that over the last few years, lending volume and borrowing costs have increased at a slow and steady pace, but there’s no indication that this pace will pick up any time soon. “The baseline of activity remains fairly constant,” said Tim D’Arcy, senior vice president at SunGard’s Astec Analytics.
In terms of the makeup of the market, general collateral still dominated volume at over 80% in 2013. This was a bit of a drop from the almost 90% level in 2010, but rather than this being an ongoing trend, the level is probably just coming into a more of a normal state, said D’Arcy. Yet in terms of revenue, 78% came from specials, and 45% came from deep specials—those that yield 500 basis points or more at an intrinsic rate.
And while the activity looks to continue on a similar path, J.P. Morgan’s Wilson remains optimistic. “From our perspective, the appetite for lending has probably never been greater,” he said. “Programs are tightly managed with beneficial owners setting parameters in accordance with their risk appetite, but we do find beneficial owners willing to consider additional ways to boost revenue. When you add all that up, it should be a bit more positive than 2013, but it is unlikely going to be an all-time knockout year.”
2014 Likely to Resemble 2013 for Securities Lending
At the IMN 20th Annual Beneficial Owners’ International Securities Lending Conference in Austin, Texas, the general consensus seems to be that the challenging environment of 2013 will continue in 2014, albeit with a slight improvement.