CACEIS
Donia Rouigueb and Dan Copin
17 March 2020
Dan Copin, group head of securities finance and repo, with Donia Rouigueb, head of sales for securities finance and repo at CACEIS, cast a spotlight on the market, their position and the views of their clients
Image: Shutterstock
Crédit Agricole and Santander completed in December 2019 an agreement to combine CACEIS and Santander Securities Services. What opportunities will this create for the securities finance and repo business?
Dan Copin: The rationale behind our activity merger with Santander’s S3 is the combined synergy potential including that for securities financing and repo. It also sees us enlarge CACEIS’ network to Southern Europe as well much of South America. Sales staff joining CACEIS in these markets can now leverage the CACEIS Group’s shareholder structure, global network and extensive service offering to gain access to prestigious firms who’s doors may previously have been closed – and this is great news for our securities lending business.
However, not all markets currently offer such strong opportunities for developing our securities lending business. In Spain, the largest market to come with the S3 merger, securities lending has not been permitted since 2007. Industry efforts over the past few years are making positive headway, especially with the current stable government, and players are hopeful that the ban will be lifted shortly. If it is lifted, then business opportunities will really open up with the many players in the Spanish market, including CACEIS. Even though we are still in the early stages of the activity merger, we are already looking to grow our expertise and take advantage of the business development opportunities.
We should also mention our 2019 acquisition of Amsterdam-based KAS Bank, the Dutch pension fund servicing specialist. Pension funds are actually less complex than many of the other types of fund for which we perform securities lending services, so the vast amount predominantly pension fund assets was easily transferred to our lending pool.
What trends are you seeing in the securities finance market?
Donia Rouigueb: In terms of financial markets, we saw equities bullish in 2019 and rising in volatility this year due to the global excess of cash although we expect central banks to cut rates as markets have dropped since the coronavirus came onto the scene. This volatility translates into higher securities borrowing and lending (SBL) activity driven by hedge funds and consequently prime brokers and there is currently high demand (and high fees) for healthcare equities in the US and Canada, aerospace, industry and consumer company equities in Europe and a growing demand for ETFs. The outlook for 2020 sees SBL fees increasing in line with rising M&A activity, tender offers, stock buy-back and scrip dividends across all regions, with moderate-to-good revenues. Fixed income, on the other hand, continues to experience strong demand for eligible collateral and high quality liquid assets (HQLA), whereas spreads are under pressure but demand for these assets remains high especially from CCPs as they can be lent out on a term structure.
In terms of regulatory influences on trends, Securities Financing Transactions Regulation (SFTR) and Central Securities Depositories Regulation (CSDR) have the most significant impact as they increase costs for managers (e.g. reporting) and so drive the trend to outsource such operational duties to a depository. Despite the heavy regulatory burden, the greater transparency has been beneficial, in effect legitimising the securities lending business and attracting previously wary managers who need its potential to enhance yields to keep up with competitors. Indeed, we are currently noting a trend in which managers that exited the securities lending market over fears about its image are now returning due to this regulatory-driven legitimacy.
Thanks to multiple clarifications from ESMA and other regulatory bodies, we have all the answers at our disposal, so if for example a new institutional client needs to know precisely how our lending programme fits within the confines of Solvency II, we have the expertise to answer every single aspect, leaving no room for doubt about potential issues arising.
What are your expectations for 2020 and what factors could affect performance?
Copin: SFTR, which comes into force in April for banks and October for funds, fund management companies and institutional players, is presently having a fundamental effect on managers’ operational structure. As players contemplate reducing transaction volumes to compensate for rising transaction reporting costs, they need more securities lending assistance from their service provider. Whereas previously they could just send instructions to the service provider and deal with the post trade part in-house or with their depositary, SFTR reporting will require huge internal IT investment that only few players such as depositaries/custodians are able to spread across multiple clients. This leaves a choice between investment heavy “in-house+parts you’re obliged to delegate” or “delegate everything”. Due to IT development costs and the need for a strong balance sheet to finance it as well as short- and medium-term processing difficulties for structured operations on one side and the legitimising effects on the other, we see a growing trend for delegation to a service provider. And from a structure point of view, those specialised in managing reporting and post trade constraints are depositaries such as CACEIS.
At recent conferences ESG has been a hot topic, is this the same with your clients and how will it affect the securities lending business?
Rouigueb: Judging by recent industry forums, ESG is the hot topic and we are definitely seeing an uptick in ESG-related demands from clients, so being in a position to provide ESG-compliant securities lending services is clearly an advantage. There are several positive market initiatives such as ISLA ESG council or label which help define best practices for lending securities and being compliant with ESG principles. However, there is a major challenge that needs to be addressed – automatically returning securities (except those cases where it is materially impossible to do so) in time for general assemblies. This can not only affect the client’s market yields but also requires robust systems to handle the multiple countries and various general assemblies that need to vote based on information at the correct value date, so it represents a technical challenge to be overcome whilst optimising the rest of the process.
Geographically what regions or countries are performing better than others? Where does your focus currently lay?
Rouigueb: In the Asia Pacific region, we see fast-paced growth in China for corporate bonds and equity and there is growing interest for India and other South Asian regions. North America remains a key player, especially for US treasuries. And finally, Europe plays an important role despite the significant reduction in spreads led by the current excess of liquidity.
What regulations do you feel are affecting the industry and stifling growth?
Copin: We have already mentioned the pros and cons of SFTR, but the European Central Securities Depositories Regulation (CSDR), which has been delayed until February 2021 may cover securities lending so could potentially bring additional costs and therefore be a sensitive topic. Nevertheless, we are coming to terms with recent regulations and there is no major piece of regulation in the pipeline that the industry could not handle.
Recent regulatory measures have definitely led to a rise in data volumes but we are now seeing a greater ‘selectivity’ of those flows, with clients and service providers looking to drastically increase the basis point lending yields due to their increased balance sheet or reinsurance costs, rather than just being content with achieving a positive repo yield, no matter the size. There are clearly regulatory constraints but there is an overarching goal to increase flow quality and quantity to gain market share without impacting financial institutions’ and institutional players’ balance sheets or solvency capital requirements.
What benefits are these supposed to bring to the industry and is there any light at the end of the tunnel?
Copin: Regulations bring a level of transparency to the securities lending business which has long been considered opaque, and transparency promotes good practice so is also beneficial for clients. Even when regulations are challenging, the securities lending industry keeps on managing to reinvent itself, turning challenges into opportunities. Rising yields and portfolio optimisation will continue to be the mantra.
The industry will see the biggest challenges and shake-ups on the post trade side, where companies will be forced to take a hard look at the financials surrounding performing it in-house. It will be necessary to take into consideration the cost of IT investment required to meet industry standards as well as the financial and reputation costs of fines for non-compliant reporting. With a part of the post trade side to be delegated as required by regulations, companies will need to either invest heavily or reorganise and outsource.
There is a light at the end of the tunnel, so long as the regulatory tsunami has ceased. In the decade or so since the 2008 crisis, much headway has been made in increasing liquidity and transparency in the markets. Over-the-counter (OTC) businesses have been challenged and adapted in order to encourage this trend. The lending business remains profitable and brings value to portfolios, but the increased costs and added complexity of monitoring the activity, clients need to rely on a strong partner that is well equipped to service their needs.
The value in engaging a partner like CACEIS is that once the decision to outsource has been made, we can handle everything from the IT investment to the reporting compliance. We have the experience necessary to assist clients in carrying out their operations and the scale which means we are perfectly placed to mutualise all the costs involved.
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