What was the biggest development in Canada last year?
Greater automation across the industry was a key theme of last year globally, and here in Canada was no different. The usage of technology to further automate securities financing transactions has been an ongoing development in the marketplace. It began with the general collateral space with auto borrow and now extends to the warm and hot space. Last year, there was generally a wider adoption of automated functions such as targeted availabilities and Indications of Interest by both agent lenders and borrowers, working together for mutual benefits of our respective clients. In addition to the adoption of new technology solutions, the European regulatory landscape continued evolving, which would impact Canadian participants with any nexus into Europe, as well as the European entities.
What impact did this have on the industry last year?
The impact of greater automation has enabled a more efficient and transparent way of transacting for both borrowers and agent lenders. The wider usage of target availabilities in the warm and hot space now allows agent lenders to proactively show inventories and take the position of a price maker. At the same time the adoption of Indications of Interest by borrowers has now automated manual lists and locates.
The now widespread use of both these automated functions has ultimately resulted in greater utilisation for beneficial holders within the warm and hot space, and more efficient.
But, not only has the use of technology in the securities lending industry made work-flows more efficient, it has made them more effective and transparent. The downstream impact has ultimately resulted in more effective pricing for clients and further optimisation of lending portfolios for beneficial owners.
What were Canadian Securities Lending Association’s (CASLA) biggest challenges last year and how did the association face them?
Not so much a challenge but rather an ongoing discussion is the viability of central counterparties (CCPs) in the securities lending industry. As regulatory reform continues to change the dynamics of our industry, the impact of capital usage, risk-weighted asset (RWA) constraints, and the way we transact may be something that the implementation of a CCP model can address. The potential for introducing CCP services in the Canadian marketplace has been a discussion point for many years, and the conversation continues amongst CASLA members.
Can you name a market driver in Canada that industry players must be aware of this year?
A couple of important drivers come to mind—the ongoing need for financing, increased market volatility and the development of the liquid alternative space.
Financing remains the largest driver in the Canadian securities lending industry today with an almost insatiable demand for high quality liquid assets (HQLA) off the back of regulatory changes. Last year, we saw steady demand for HQLA from financial institutions that has persisted well into 2018. Furthermore, the demand for more structured term lending to facilitate these financing needs will be an ongoing driver of HQLA this year. Additionally, the ongoing focus applied to monetary policy on both sides of the border is also a key driver in the securities lending marketplace today. As the interest rate environment continues to change, additional rate hikes can often translate to an increased demand for specific issues. A general rise in yields can also potentially lead to increased demand for HQLA.
Last year, we experienced somewhat limited volatility, reducing the number of intrinsic value trades in the marketplace, especially through a North American lens. However, H1 2018 has already seen more volatility as the geopolitical environment and concerns over NAFTA negotiations build on both sides of the border. This renewed sense of volatility in markets, particularly seen in North American equity markets, has resulted in both an increase in the number of directional trades as the variety of shorts by investors also increases.
As investors increasingly seek to gain further access to exposure, liquid alternatives remain an ongoing development in the Canadian funds space and could potentially be an important driver of demand in the future. The introduction of greater leverage capabilities across Canadian mutual funds will inevitably result in a greater demand to borrower.
What will be the top securities lending trend this year?
The rise of non-cash collateral continues to be a top trend in the securities lending market in North America. Although cash collateral remains a significant characteristic of the marketplace, a noticeable move towards a greater use of eligible securities as collateral has been seen. This trend has especially been driven by margin requirements for over-the-counter (OTC) and the migration to central clearing for derivatives continues to increase the demand for optimisation and liquidity solutions. As such, more and more institutional investors will be looking to the securities lending market to fulfill growing collateral needs. This is one trend to watch as we head into H2 2018.
Another ongoing trend seen throughout last year and well into this year, is the persistence in demand for structured term loans at both an asset class level, as well as specific stocks. Today, agent lenders are having more frequent conversations with beneficial owners on the risk/reward associated with term opportunities as they present incremental returns on collateral flexible portfolios.
What is the association currently working on?
In the near future, CASLA will be launching various sub-committees designed to enhance our presence and continue to engage with stakeholders in the Canadian industry. One of CASLA’s fundamental aims is to enhance the public’s understanding of securities lending and the role it plays in Canada. As such, the role of an educational sub-committee at CASLA will be focused on developing and promoting the importance, subtleties and breadth of the securities lending industry—particularly geared towards beneficial owners. Another aim of CASLA, is to encourage the adoption of best practices and work with regulators to ensure an efficient and secure marketplace. This is an important discussion to have and consider here in Canada. The regulatory environment continues to evolve and can be beneficial to all stakeholders as we move further into an age of transparency. Lastly, we would like to broaden the membership of CASLA to reflect the growth of the industry over the years, both on the buy/sell side.
CASLA has also entered into early discussions with the Ontario Securities Commission about allowing public mutual funds to be able to accept other eligible equity securities as collateral when entering into securities lending transactions.
What can we expect from the conference this year?
This year’s conference will be focused on addressing matters at the heart of our industry in the Canadian securities lending space. Our panels will include topics around regulatory and funding, alternative investments, and provide perspectives from our industry’s leaders. In keeping with industry trends, CASLA and its members have come together to use technology to drive this year’s conference. If you haven’t heard already, we have launched our very own conference app, which provides attendees with access to the conference materials and agenda, as well as to our panelists and CASLA to submit questions and comments prior to, and during the event. We will also be taking advantage of the survey function to poll our delegates throughout the day on a variety of topics.
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