Global Head of Securities Lending ● HSBC Securities Services ● Hong Kong ●
Roy Zimmerhansl moved from London to Hong Kong in February 2015, retaining his title of global head of securities lending for HSBC in the latest chapter in a long and eventful career. Since 1980 Zimmerhansl has held positions at agent lenders, investment banks, a central depository and an inter-dealer broker. Within those companies he has operated as a consultant, training company owner, software company product specialist, head of securities lending and even had a spell as a journalist.
Zimmerhansl began his career at CDS in Toronto, then Royal Bank of Canada before hopping the pond for CIBC, Chase Manhattan, Nomura, Rabobank and then Deutsche Bank. Considering the list of the custody and securities lending firms he has worked for in influential roles, it is hardly surprising he earned his title as a GC Legend. In 2006, Zimmerhansl guided the launch of ICAP’s trading platform, i-SEC, before leaving in 2008. HSBC came calling in March 2013, and he has remained at the company ever since.
Is it refreshing to focus on growth rather than just regulatory headwinds now you are based in Asia?
The Asia story is definitely one of growth. The reason I am here is to help participate in that growth and hopefully help and contribute to it.
If you look at it structurally, it is growth of the asset gathering institutions. In the US, Europe, Australia, Japan and Canada there have been a number of markets where we have had big asset gathering institutions for a while, whether those are pension funds, superannuation funds, insurance companies. Those organisations have been accumulating assets for a long time but these same investor types are also newer in Asia in terms of being big asset gathering pools. From a client point of view this is where the insurers, sovereign wealth funds and the pension funds are going to have the most dramatic growth going forward. You have got China, India, Indonesia, Philippines – all those markets that aren’t part of cross border lending today that could or will be in the future.
So is there less of a focus on regulation with all the optimism in the region?
Regulations are everywhere and provide the boundaries for us all to do our business; they are a fact of life. I believe securities lending has actually benefited from regulations. If you look at the main difference between when I did my first loan in 1981 to today, back then it was a profitable little hobby that some firms did. Some institutions were aware of it but never participated, however post-crisis there are now a number of institutions that lend today that never used to.
When you ask them why, they will tell you it is because of the increased transparency. Regulators have said in various reports that securities lending is good for the market, and for the first time many investors actually feel comfortable that it is an acceptable practice. Maybe it has been the whole time but now there is a regulatory environment around it and there is regulatory scrutiny some feel newly comfortable participating in it. Oddly I think the financial crisis has brought about an environment where the longevity of this business has become a certainty. It is now enshrined as something that is part of the market, and that is great because 100 years from now it will still be there.
People will always debate about whether short-selling is good or bad. and whether the price transparency it creates does public good or not, but – like it or not – it is a part of the market.
The other thing is collateral transformation trades. The whole environment today means that collateral is more important, creating a whole new trade and terminology. I did my first collateral transformation trade in 1994. We just didn’t call it that. Now it is a normal part of the business and that is a direct reaction to regulations that have nothing to do with securities lending but investors have the opportunity to benefit from that.
If you’re focussed you can work within the regulations which limit what firms do and make the others contributory to what you do.
China and India are two potentially huge markets for sec lending, what opportunities do you see in those countries?
If you look at the biggest securities lending markets in equities and you map that against the biggest stock markets by capitalisation, then you get a pretty strong correlation there. The top 10 stock markets are the top 10 securities lending markets. In the top 25 there are three markets that stand out as not being involved in securities lending and they are India, China and Saudi Arabia.
China is a new market despite being one of the biggest equity and fixed income markets in the world. They allow securities lending and short-selling among domestic Chinese participants, so because it is a new market and new practice, there isn’t a lot of it going on. There is a real desire from the regulators to open up the Chinese market and make it accessible to non-residents and make it look like other developed markets. They have been very engaged in the process and getting feedback on how they can take their market forward, the only thing we don’t know is how long the timeline is. Will they make changes this year, five years, ten years? Probably the market volatility we have seen recently means that whatever date they did have in mind will be pushed back a bit further. There isn’t any doubt in my mind that it will be implemented though.
If I look out three to five years I fully expect China to be in the top five or even top two markets by balance. Coming from nowhere to that is huge.
India is a different story, partly because they have had a number of different securities lending regimes that have existed for ages. Before they introduced securities lending for the first time in 1997 they had a practice called Badla which was the same kind of effect.
There is still a regulatory concern about non-residents participating in the Indian market and influencing it unduly. There is a reluctance in a number of different areas, possibly that is their natural approach to be extra cautious. They have tried to relaunch securities lending again and again, and with each time they have had some increases but haven’t made a real sea change. This is because the core restrictions are still there, any way you dress it up those limitations still exist. I actually believe India is watching to see how China deals with it. A successful implementation by China may influence their thinking.
In the interim period if there is to be progress it is much more likely to be an industry-led initiative that influences regulators. I’m on a working panel of market-side practitioners who are putting together a number of recommendations for the regulator in India to say ‘here are things you can do to improve your domestic securities lending market’ and ‘here are things you can do to enhance it so that non-domestic investors can participate more actively’. These proposals are ways that won’t disrupt the market but will be beneficial. There’s no way to predict if we will have any influence or not, but this is the first time an industry group has come together with ideas like these.
What are the barriers in them opening up?
If you talk to regulators who have opened up securities lending in recent years they will tell you that after looking into it – if they are allowing their markets to trade freely their biggest concern is peaks and troughs. Regulators that have actually looked at it and done the analysis have realised that by facilitating securities lending, what happens is that as markets are peaking and everyone is on the bandwagon buying, the only people that are actually selling are the contrarian investors who need to be able to borrow securities to do that. So rather than the upward momentum carrying on indefinitely you have this dampening effect of short-selling activity. That helps curb that upward slope and then on the way down, of course, short-sellers contribute to market sell-offs and might increase the momentum, but the reality is that short-sellers only make a profit once they have brought the stock back. So institutions will often be buying and selling at the same time, so when the whole market is selling-off – who are the only buyers? They are the short-sellers who are looking to buy the securities to lock in their profits and close out their positions. On the downward slope it has the effect of flattening that downward curve and being beneficial on stemming the troughs. Those are the benefits some regulators have come to understand.
How are other countries in Asia looking at growing their sec lending markets?
The main markets that haven’t implemented it are Indonesia and the Phillipines, but they are well on their way to launching at some point and they have done some pretty intensive work on how to introduce it into the market.
Indonesia has all the right characteristics, it is a bit like Malaysia. People were talking about Malaysia for years and now that market has really started to take off, Indonesia could be like this. The only issue is the type of infrastructure they bring in. We have seen examples of markets that have tried to bring in a complicated structure and it is just not really workable or it is complicated and changes the risk profile.
You have to remember that securities lending is an optional activity for lenders. While a hedge fund might have to borrow securities to trade, for lenders it is optional. Short-sellers aren’t going to look at a market unless they believe there is sufficient supply so that they can have sustainable trading activity and lenders won’t lend unless there is sufficient demand. It is a bit chicken and egg in that way. If a market infrastructure is too complicated people will avoid it.
Would you ever have thought your role would end up taking you to work in Asia when you started out in securities finance 20 years ago?
It was over 20 years ago when I made my first visit to Asia. It always struck me as the most dynamic, trading oriented environment across all of the regions. Very focused, but small both in the number of Asian market participants and markets where securities lending is permitted. There have been massive strides made on both of those issues so both the growth and the future potential for Asia remains huge from both market opportunity and client participation. I don’t think I ever expected to be based in Asia, but I always expected it to become a substantial revenue driver. Today Asia is arguably slightly ahead of Europe in terms of revenue generation – the future addition of China and India would extend the region’s importance in the business.
If you had to make one prediction about how the industry will change in the next 10 years, what would it be?
I expect securities lending to become more like cash equity trading. Pervasive, high volume and automated. It will be an integral part of equity and fixed income trading markets but also treasury, inventory and exposure management through collateral management of all major financial firms.
What are you most proud of looking back at your career?
I think the growth of the industry is largely due to a better understanding of the value of the business by both participating institutions and interested parties including end investors, regulators, exchanges. Since doing my first stock loan in 1981, I have worked at firms willing to invest in the business, with many people interested in growing securities lending at those firms and given training sessions to many others in countries across. I’d like to think that I have made a contribution to that improved understanding and as a result, contributed to the growth and longevity of the business.