February 2017

It’s a new dawn in the U.S., with a new president, opportunities and challenges. How can beneficial owners navigate the new landscape?

The securities lending industry faces a new dawn of geopolitical change. Amidst this backdrop, Joseph Santaro, head of product sales for the Americas – Agency Securities Lending at Deutsche Bank, joined a panel of senior industry experts to discuss the challenges and opportunities.
A key theme to emerge from the discussion was that volatility can be good for lenders. The erosion of European yield enhancement and lower demand for general collateral should encourage beneficial owners to rethink current approaches, be it to markets, collateral, structures or general parameters. They should also monitor the evolving requirements of the Securities Financing Transactions Regulation (SFTR) in Europe and the U.S. Securities and Exchange Commission’s Investment Company Reporting Modernization Act, for example.

In short, beneficial owners should be aware of five themes in order to navigate the challenges and opportunities from an evolving landscape:

#1 Engagement should be at the top of the to-do list

Given regulatory changes that are in effect and those that are on their way, beneficial owners should engage the market on how change affects them, their agent and counterparties. Amidst the challenges, the new environment can bring new opportunities for those who are willing to invest time in optimising their strategy and work with their agent lenders in uncovering trading flexibility and approving borrowers who may incur higher balance sheet costs. 2017 might be an ideal time for beneficial owners to re-examine the overall value proposition they receive from their agents and look at their capacity with respect with respect to indemnification and relationship pricing, for example. Beyond traditional yield enhancement, they should explore financing and collateral management.

#2 Higher interest rates should not have a profound effect on trade choices

Interest rate risk should not have a profound effect on trade choices. Deutsche Bank focuses on lending securities that are in the highest demand and operates on a separate account basis. Agent lenders and their beneficial owners should stay in close communication with counterparties and manages rebate rates as the Fed moves.

#3 The current low-yield bond environment will impact lenders differently depending on the region

In keeping with client preferences and convention, in Europe, the majority of Deutsche Bank’s trades are already booked versus non-cash collateral. In the U.S., until more recently, the bank did not feel compelled to move an appreciable portion of its book to non-cash, said Santaro, so clients have been able to enjoy the added pick-up associated with cash collateral.

#4 The securities lending market should wait and see how it will be affected by President Trump’s likely regulatory approaches.

The market should wait and see what specific growth-oriented economic policies the new administration will promulgate, and whether post-crisis regulations might be repealed or rolled back in a meaningful way. Market volatility will always provide opportunities in the securities lending market, so if the tone and content of the election campaign carries over into the next few years, a higher level of market volatility is possible, said Santaro.

#5 SFTR will clearly mean a technology spend for service providers to comply, but a global reach, robust platform and solid expertise should help

In October 2016, the SEC adopted rules which will enhance data reporting for mutual funds, exchange-traded funds and other registered investment companies. The rules, to be adopted by the industry in October 2018, call for new monthly and annual reporting forms, enhanced standardised disclosures and new disclosures in fund registration statements relating to a fund’s securities lending activities. A provider that operates on a real-time platform with a dedicated technology team, that services global investors across multiple jurisdictions and is very active in analysing new regulation, should be best placed to help beneficial owners navigate the new landscape.

To read the full panel discussion in Securities Lending Times, click here.

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