David Martocci, Citi: We believe that 2013 will see a continuing resurgence in the global securities lending industry. Market recovery and growth, together with emerging best practices on the part of leading lenders, will drive the advance of securities lending as an important and valuable strategy for asset holders. Over the course of 2013, three key themes will define the industry – flexibility and customisation, programme transparency, and expansion into untapped emerging markets.
During the past few years, agent lenders have increasingly focused on providing customised lending solutions to help meet the increasing demands of their clients. As the market evolves, we expect this trend to continue, becoming an essential feature of the securities lending industry.
Beneficial owners are continuing to take greater control over the management of their lending programmes. Bearing this in mind, it is critical that agent lenders provide clients with complete and transparent access to their programme data, delivering this information in customised, easy to access and easy to use formats.
The dynamic growth of emerging markets as an asset class has driven the steady expansion of securities lending in this space. As asset holders increasingly allocate investments into these markets, agent lenders must develop the expertise and infrastructure necessary for maximising the value of lending in these markets. “As 2013 begins, it is imperative that beneficial owners ensure that their agent lenders can provide all of these critical capabilities in order to maximise the benefits of securities lending to their portfolios.
Paul Wilson, JPMorgan: We have a sense that 2013 will predominantly be dominated by two things – regulation and continued suppression on the demand side. The regulatory landscape continues to develop and keeping ahead of the proposals, white papers and directives, especially when some of the regulation is not securities lending specific, will take up an ever-increasing amount of time in 2013. The common themes across this myriad of regulation can broadly be classified as systemic risk, transparency, investor protection, collateral management and tax developments.
Throughout 2012 we saw renewed interest from asset owners either to engage in securities lending for the first time – or to re-engage – or to look to expand existing lending activities to capture additional returns. This is driven by, among other things, the low interest rate environment – including the cut to zero in the eurozone – and a desire for low riskadjusted incremental returns.
However, the pressures on the demand side – given lower hedge activity, the capital and balance sheet constraints of borrowers, the macroeconomic impact of central bank involvement, eurozone uncertainty and the evolving regulatory landscape – has meant that volumes across the industry continue to reduce.
Our focus has been on trying to match the demand and supply side by growing supply thoughtfully and in line with assets, markets and collateral types that are in demand and helping asset owners extract more value. Collateral flexibility, access to emerging markets and innovative trade structures will be important areas of potential revenue generation in 2013.
Wayne Burlingham, HSBC Securities Services: I think most market players will agree that although revenue streams remained fairly respectable in 2012 it proved to be a another very challenging year for a multitude of reasons. Some of the changes announced last year will actually become effective this year; others remain pending and are yet to be fully digested with a few more still remaining in the incubation stage.
So what do we consider to be the major issue this year? Of the many possible answers we are pro-actively monitoring both the current and potential future opportunities associated with the progressively important area of collateral transformation trading.
We have seen two strong drivers emerge. Firstly banks seeking to borrow high quality government debt on a term basis to meet their regulatory requirements around Liquidity Coverage Ratios. Secondly, firms increasingly are having to source and provide eligible collateral to central counterparties in support of their OTC derivatives trading activity. Both provide excellent opportunities for our lending clients to generate meaningful additional revenue.
From a risk point of view our clients are looking to HSBC to provide its robust counterparty indemnification across this growing activity.