CIBC Mellon
Lisa Tomada
28 May 2024
Lisa Tomada, vice president, global securities lending at CIBC Mellon, explores Canada’s securities lending market and the key drivers impacting the further development of the sector
Image: Lisa Tomada
How has the Canadian securities lending market evolved over the last year?
Over the past year, the Canadian securities lending market has seen change consistent with other global markets in terms of trends, market size, and technological advancements. One notable trend is the concentration of specials, with a lack of sector specials leading to larger than normal fluctuations in securities lending revenue.
Beneficial owners holding individual securities in demand have continued to perform well, benefitting from this concentration. Both in the Canadian market and globally, there has been a trend of lower average fees and reduced lending revenue across many asset classes. This shift underscores the importance of collateral flexibility. In the current market environment, where borrower interest is influenced by regulatory and internal capital requirements, those lending clients who exhibit flexibility in their collateral acceptability tend to achieve higher than average utilisation and fee spreads. These clients are better positioned to take advantage of opportunities to participate in loans, as borrower collateral requirements evolve.
What impact do global economic events have on securities lending in Canada?
Global economic events have a significant influence on securities lending in Canada, reflecting broader trends in the global securities lending industry as a whole. Typically, we would expect events such as the timing of interest rate cuts and geopolitical instability in the Middle East to increase volatility, and in turn, some borrowing demand. Instead, the global trend of single security specials has driven lower average balances on loan for the year, while leading to higher average fees on lending activity. This dynamic highlights the interconnectedness of global economic events and the securities lending market in Canada.
What do you see as some of the most prominent challenges and risks associated with securities lending, and how are they managed?
The securities lending industry faces several prominent challenges and risks, including counterparty default, collateral liquidity, and market volatility.
Counterparty default is managed through rigorous credit assessments and the establishment of robust counterparty risk management frameworks. The collateral posted by borrowers, cross-product, and cross-principal netting, all help to mitigate counterparty default risk. This collateral is carefully monitored and adjusted to reflect market values on a daily basis.
Ensuring the liquidity of collateral is crucial. Lenders accept a range of collateral types, prioritising those that can be quickly liquidated if needed, adjusting the collateral levels accordingly.
Market volatility poses a significant challenge by affecting the value of securities on loan and the collateral posted. To manage this risk, lenders employ dynamic risk management strategies, including stress testing and scenario analysis, to anticipate and respond to market fluctuations effectively. By adopting these mitigation strategies, the securities lending industry aims to safeguard against potential risks, while maintaining stability and efficiency in lending operations.
How is today's interest rate environment impacting securities lending activities?
Today's interest rate environment is having a notable impact on securities lending activities. Despite positive results for Canadian banks in the first quarter of 2024, these institutions are setting aside larger provisions for credit losses. This conservative approach has led some banks to eliminate their discounted Dividend Reinvestment Programs (DRIPs). The elimination of discounted DRIP programmes is significant because they currently represent some of the top revenue-generating securities in the Canadian equity space. As a result, their discontinuation will impact Canadian clients more heavily because of the higher volume of holdings of Canadian bank stocks than other global beneficial owners may have. Moreover, the broader interest rate environment influences borrower behaviour, further affecting the dynamics of the securities lending market.
What technological innovations are influencing the Canadian securities lending market? Blockchain, Al, and automation?
With T+1 starting in Canada, the US and Mexico within days, automation and coordination between market participants has been at the forefront of technology and governance around the T+1 implementation. Regardless of all the operational improvements that are being ushered in by the shorter settlement cycle, beneficial owners continue to be an important part of the process: notifications to agent lenders must come earlier and more efficiently as part of these new settlement timelines. The industry continues to use Al in new ways to help with identifying opportunities and increasing operational efficiency.
What are the future trends and predictions for the securities lending market in Canada?
The securities lending market in Canada will see change in the coming years. Beneficial owners will continue to seek incremental revenue from their securities lending programmes. Adapting to market changes that help borrowers and agent lenders manage the increasing capital costs associated with securities lending programmes, will be a dominant theme throughout 2024 and beyond. Canadian beneficial owners are becoming increasingly sophisticated. Those who actively engage with their agent lenders as they make changes can continue to benefit from their lending programmes. This proactive approach allows beneficial owners to stay ahead of market shifts and optimise their lending strategies.
As beneficial owners advance their investment strategies and reporting capabilities, there is a growing desire for meaningful data and enhanced transparency. They are looking for detailed reporting on the status of lent securities and overall programme performance to meet their increasing internal governance requirements.
This trend underscores the need for robust data management and reporting tools within the securities lending industry. The shift of talent among various market participants, and specifically among beneficial owners, presents an opportunity to discuss securities lending programmes in new ways with new faces. From a client service perspective, there is an emphasis on educating new employees or different departments within beneficial owner organisations, to get them up to speed with programme basics. Simultaneously, detailed conversations are being held with organisations where new employees bring their securities lending expertise from other environments, fostering a culture of openness to new ideas and perspectives.
Technology remains a focal point as innovation and increased regulation introduces new players, new risks, and new opportunities. The securities lending market will continue to evolve with advancements in technology, which will drive efficiencies, improve risk management, and create new business opportunities.
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