“We report back to clients daily, whether it’s securities on loan or collateral at the asset level, or assets in their reinvestment portfolios. So we’ve always been transparent,” D’Eramo adds. “We would like to see the industry move to a much more risk-adjusted, transparent type of reporting, which we’ve obviously seen a demand for.”
Transparency is a universal theme among clients, acknowledges Trapp. “Our commitment to clients is that we’re transparent. We’ve always made it a priority to provide clients with reports that help them understand their risk and return in securities lending. Now, in response to client demand for more frequent and easily accessible information, we have launched an automated reporting platform, the Securities Lending Dashboard on Passport.”
Securities lending involves three main parties. 1. Those that own the shares: pension plans, mutual funds and insurance companies. 2. Those that want to borrow the shares: prime brokers at investment
banks on behalf of hedge funds and the investment dealers them-
selves on behalf of their proprietary trading desks. 3. Custodians, which, as agent lenders, manage loans on behalf of
beneficial owners while monitoring the credit quality and operational
strength of the borrowers. |
Creating CASLA
Transparency goes further. Last year, as securities lending began to recover, Canadian custodians and other market participants created an official association to be an advocate for the industry before governments and regulators—the Canadian Securities Lending Association (CASLA).
“Originally, there had not been a formal lending association in Canada,” explains Rob Chiuch, CASLA president and vice-president, head of trading, global securities lending, with CIBC Mellon. “But the various market participants had had success on an ad hoc basis, working on various initiatives that were of interest to the industry. There’s no mystery behind it. We decided at a critical point that it made sense to organize officially.”
CASLA’s officers are drawn from the four custodial banks, which are, in total, responsible for 90% of the securities lending in Canada as well as a large Canadian pension plan, the prime brokerage units at Canada’s big banks and the law and accounting firms that service the industry.
“One of the successes of CASLA has been that we quite deliberately differentiated ourselves from other similar groups by inviting participation from non-lender-borrower participants,” says Chiuch “We’re trying to attract a greater breadth of experience to the association so we can more broadly address industry issues. That’s not a model that’s typical of the other associations around the world, and I think that it’s getting some attention.”
Recovery Mode
Despite the angst over securities lending at the height of the financial crisis, the industry has come back in Canada—though, with a twist: the securities are available, but the demand from borrowers has decreased.
“Canadian lenders’ on-loan positions are down 30% to 35% from the peak in 2008,” says Slater. “The global numbers are actually off substantially more, in the neighbourhood of 60%. Definitely, the borrowing volumes are off, but what we have seen in the last six months is that they are stabilizing.”
Borrowing may be down thanks to a variety of factors, he adds. “There are some cyclical aspects to what’s going on. I don’t think they’re secular. I think they’re cyclical in that the equity market’s been on quite a run, so there absolutely is a long bias to the market.”
With a long bias, borrowers are not necessarily hedging their positions or taking directional bets. But beneficial owners are more confident.
“Those that did exit the program have predominantly all come back into it,” notes Wylie. “I think there is lower demand than what we’ve seen in the past, and that might be related to a number of borrower consolidations over periods and deleveraging or closure of hedge funds. I think even from the borrower side, they’re more selective on the type of trades they’re willing to do today.”
In the end, Canadian lenders and custodians have fared pretty well after Lehman. So have Canadian hedge funds, which are reporting reduced borrowing costs. But the future is probably going to be similar to the pre-Lehman past. “Securities lending should be two or three things,” says Faulkner. “It should be unexciting [and] simply low return—which is not very positive. It should be low risk—which is good. Therefore, it should offer a high-risk-adjusted return. People should be looking for a steady, stable, high-risk-adjusted return contribution to their portfolio.” BC
Scot Blythe is a freelance writer in Toronto.
rsblythe@hotmail.com
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© Copyright 2010 Rogers Publishing Ltd. This article first appeared in the June 2010 edition of BENEFITS CANADA magazine.
