Buy-side firms are counting on lending agents to explore different avenues of access to market liquidity as the role of securities lending changes, according to a panel titled “Industry Leaders’ Perspectives and Predictions” at the Annual Securities Finance from the International Securities Lending Association (ISLA). and Collateral Management Conference.
ISLA Managing Director Andrew Dyson, who moderated the conference, opened the panel with an interpretation of the changing landscape of securities lending. He says: “There’s a traditional view of lending, which is lending a specific stock to a borrower to cover a short, or whatever.
“That’s always a factor in what we do. But the point is that while institutional investors have had to come to terms with the world of margin in the context of uncleared derivatives, we’re seeing that increasingly, programs are used to create and manage liquidity in very different ways. The world of specific stock lending is still there, but it’s a very small piece of the pie.”
Accepting the alternating landscape of securities lending, four speakers explained how their operations had changed based on client demands.
Ernst Dolce, head of liquidity solutions at AXA IM, says the firm’s clients used to focus heavily on their securities lending performance, but in recent years client attitudes have taken a different direction.
Dolce says: “However, in the past two years with the crisis [e.g. when the pandemic happened], we had to open the toolbox to meet their strategy – clients look at what happens when they have assets that could be used as collateral for uncleared or cleared derivatives, repos or they could be monetized. In this context, what is the best use of their assets? This is a simple question you need to answer for a client.
Dolce explains the importance of talking to clients – especially those doing cleared or uncleared derivatives, repos and also securities lending – and asking what is the cheapest to deliver in the market, what can- monetize yourself, what type of spread can you play in the market with these transactions and, in the event of a liquidity trap, how can you manage this?
According to Jon Atkins, Head of Alternative Financing, Agency Title Financing at JP Morgan, the days of “you joining your banking partners and asking for an unlimited, profitable credit facility in March 2020 just wasn’t right.” occur “.
There has been an acceptance by all market participants, particularly on the buy side, that they need other means of accessing market liquidity, Atkins continues, and in many companies are turning to agents. to do it.
Atkins explains: “When you think of companies that run bilateral repo transactions themselves and the significant cost that has been injected into this secured funding activity – whether it is the result of regulatory initiatives such as SFTR, CSDR or the ongoing cost of operational processing and fintech enabled downstream processes. It’s very expensive to run it yourself, that’s why they come to people like us as agents and say “we want to take advantage of your pipes and plumbing”. Can you connect us to different liquidity providers, cleared venues, and other like-minded institutions that have slightly different access to liquidity? »
This reservation applies not only to the largest and most sophisticated customers, but also to new market participants.
JP Morgan’s Atkins says this is a trend seen with various clients for a multitude of reasons. He adds: “When you think of the new entrants into our market over the past two years, whether they are cash-rich tech companies or neo-banks – all without any legacy infrastructure to be able to engage in the repo markets and the loan markets – they don’t want the operational burden of having to set everything up for themselves so that they go to the people who can.
Following the comments, Florian Huber, Barclays head of equity finance for EMEA, said the bank needed to find solutions to liquidity issues for its hedge fund clients, with uncompensated margin (UMR) rules being a major problem.
Huber continues: “On the other hand, going back to the opening question on equity lending versus financing or financing, when we deal with our proxy counterparty lenders, it’s almost all about financing and of financing. Obviously, we need these particular ISIN codes for T+1 or T+0 and in these particular sizes; but this process is very well automated.
“However, our equity lending team spends time finding solutions for the finance team with the lending officers, and there we’ve seen a lot of great conversations and exchanges happen. Some of it came out of the pandemic, but it all started before that.”
Gesa Johannsen, EMEA Head of Clearing and Collateral Management at BNY Mellon, explains that after opening 3,000 accounts during UMR Phase 5 – the first big wave where BNY Mellon also had clients buy-side – 50% of buy-side customers have chosen three-party over the traditional third-party model.
She says, “Like the sell side, they realized they needed to optimize, they needed to have a holistic view of their asset inventory and they needed to optimize the various bilateral trade obligations. And we see the same thing with wave six.
ISLA’s Dyson offered a suggestion during the crisis that some institutional investors felt let down by their liquidity providers, from a counterparty and market perspective. As companies reassess how they generate cash for a variety of reasons, the role of securities lending is changing.
However, the panel unanimously failed to see an example of this.
Johannsen adds: “I think it’s not that they feel disappointed, they’re just realistic that there might be balance sheet constraints with their peers and they want to expand their network. That is why they need non-confrontational agents to help them on the side of collateral transformation.