CASLA: A roundup of the Canadian market
25 June 2024
Having attended the CASLA conference in Toronto in May, Carmella Haswell and Sophie Downes provide a roundup of the key findings from industry discussions
Image: CASLA
The Canadian Securities Lending Association’s (CASLA) 14th annual conference took place in Toronto last month, where market participants gathered to discuss the region’s current financial landscape, the days following the implementation of T+1, as well as post-trade challenges and market trends.
CASLA was created with a mission of ensuring the long-term viability of the Canadian securities lending industry by establishing a unified voice. Its membership includes over 20 firms in Canada and the US across broker-dealers, asset managers, custodial banks, prime brokers, and technology providers.
Below, Securities Finance Times provides highlights of the event’s key discussions. Canada is underdeveloped and must rethink collateral approach
The Canadian market requires improvement, especially in terms of repo and collateral, according to panellists at the CASLA conference in Toronto.
The panel discussed post-trade challenges in the session entitled ‘Market Infrastructure Revolution: Navigating Post Trade Challenges and Partnering in Industry Transformation’.
Moderated by Steve Everett, head of business strategy and Post Trade Innovation at TMX, panellists agreed that the Canadian market requires improvements in the collateral space.
According to Nick Chan, managing director, head of financial resource management at BMO Capital Markets, “Canada is unique”.
“When I look at how we operate compared to other jurisdictions, we tend to come through things by collaboration, discussion and standardisation,” he added.
Triparty was not a term that was known to local Canadian participants until very recently, said Chan, who believes that this has come from “the fact that we have had good access to well-developed funding markets that did not rely on us to have much collateral reuse”.
During the discussions, Chan indicated that collateral has become a core part of the way the Canadian market manages risk. In the area of collateral reuse, he believes that “we have been underdeveloped, and there is an opportunity to evolve”.
He continued: “The Canadian market has been very resilient, but there is an opportunity for us to evolve the infrastructure to pave the way for more innovation and liquidity, which will lead to more Canadian market participation in the future.”
Following this topic, Maksym Padalko, operations and policy advisor at the Bank of Canada, highlighted that the country lacks a general collateral market. In addition, he stated that the term repo market could also “be more active”, and usage of Canadian collateral or securities in foreign markets, such as in the US and Europe, could be expanded.
“In terms of the importance of having the proper infrastructure, there are broad systemic benefits,” Padalko explained. “If you have a well developed term repo market, for example, and you face sudden volatility like what we have seen in the past, term repo markets can help to absorb some of those shocks — such as risks, big price moves and margin calls — in the near term.”
Adding to the debate, Value Exchange CEO Barnaby Nelson pinpointed how the “incredible costs” the industry carries everyday to support the current infrastructure in the collateral repo space, from a balance sheet, risk-weighted asset (RWA) and operational cost perspective, was “striking”. He asked: can we afford not to?
He concluded: “There is no way we can run our collateral and repos in 10 years in the same way that we do now. We are just entering the triparty era in Canada, arguably, the revolution is well advanced in Europe and Asia. It would be wrong to think we have the luxury of time.”
T+1 achieves a smooth landing following implementation
T+1 proved to be a smooth transition for the US and Canada, and now participants have advised the UK not to be afraid to “have those difficult conversations”, as the country works toward the implementation of a shorter settlement cycle.
The panel entitled ‘T+1 in the Rearview’ discussed the move to a shorter settlement cycle for the US and Canada over a week after its official implementation.
Moderated by Phil Zywot, head of North American equities and US corporates at BNY, panellists were questioned on the unexpected surprises of the transition, recalls, automation, and how the UK should handle its own transition to T+1.
It appeared that the “unexpected surprise” from the T+1 go-live was that there were no surprises, said Ahmed Shadmann, head of Agency Trading Canada and non-US equities at State Street. He added: “I was preparing for the end of the world scenario, but it was pretty smooth. The preparation paid off.”
For one panellist, there were “a few hiccups” during the transition, however, market participants were prepared and continued to monitor the move.
An industry fear regarding the potential increase in fail rates during 27-28 May “did not materialise”, confirmed Mathilda Yared, managing director of global securities finance at National Bank Financial.
The panel agreed that the transition to T+1 brought the industry together, as firms participated in “an immense amount of collaboration and discussion”. However, one panellist in particular said that T+1 may be in the rearview, but it is a long road ahead. He advised firms to remain vigilant and to not become complacent.
In April, the UK government gave the go-ahead for the country to move to a T+1 settlement cycle. This journey will be led by the Accelerated Settlement Taskforce (AST), with the aid of its Technology Group, which aims to implement T+1 no later than the end of 2027.
Offering advice on the UK’s T+1 implementation, the panel noted that firms should not be afraid to have “those difficult conversations”. Companies should partner with all of the respected firms, leverage their vendors, and listen to the solutions that are out there.
Alexa Lemstra, director of client relationship management at EquiLend, encouraged the UK to “get a head start” as deadlines will “come up quickly”.
She continued: “Use the budget and focus of the deadline to look at your full lifecycle and understand where you can find more efficiency. Participants will be moving into a real-time environment, and so they will need that risk mitigation view, transparency and visibility in the back, middle and front office. Everyone needs to move quickly to handle any exceptions coming out.”
In conclusion, Yared said: “Partnerships between borrowers and lenders is extremely important. The UK needs to establish that line of communication, even if it is difficult.
“Take a look at the available market infrastructure. Maybe what you want to achieve as an industry with the currently available infrastructure is not possible, but there is no reason why firms can’t get together and put something in place that will help reach the needed end result, like we did in Canada.”
The market faces challenges with regulatory definitions
Regulatory requirements need to be much clearer, agreed panellists at the CASLA conference.
The panel discussion, titled ‘Regulatory Discussion: Who is Drinking and Who is Paying?’, applied a Croatian phrase to the subject of regulations, typically denoting a confused and disorganised situation.
In light of current regulations, particularly Basel III Endgame and the US Securities and Exchange Commission’s (SEC) 10c-1a, the speakers concurred the phrase was apt.
Focusing on the Basel III Endgame, the panel outlined key issues that the regulation has created for banks.
Firstly, they discussed potential problems with defining investment grade counterparties under Basel III Endgame, and how narrowing this definition could impact capital treatment of certain assets.
The session also discussed concerns from beneficial owners regarding the operational risk framework, highlighting the additional demands it will place on overall bank balance sheets by assigning additional capital requirements based on stress testing results.
One panellist specifically noted increases in market risk, pointing to challenges for firms’ business model, operations, as well as for franchise optimisation.
When questioned on whether the regulation really would be the ‘endgame’, one speaker was dubious. They did, however, acknowledge that the collective impact of the regulation would highlight some of the gaps within market infrastructure that could be built on.
Discussion then moved to consideration of 10c-1a, highlighting the numerous questions that the regulations are yet to answer.
For example, questions remain around what constitutes a 'reportable event' and how much new development work will be required from existing SFT reporting systems.
Likewise, speakers explained that questions of jurisdiction still persist, and that there could be a potential overlap with Securities Financing Transactions Regulation (SFTR) requirements. In essence, they suggested, there needs to be significantly greater clarification regarding these reporting requirements.
As the panel concluded, discussion reverted back to the opening title: who will be drinking and who will be paying?
For one panellist, the issue comes down to capacity. The Canadian market might have some success, they posed, arguing that the size of the US Treasury clearing model might take a while for everyone to have sufficient access to it.
Getting new standard documents that are modern and useful for this purpose is going to be really important, the panel noted.
The speakers expressed being unsure if they can get there in preparation for implementation of these rules, or at least in a way that is generally useful for the market at large. But they are trying really hard to make that happen.
Industry needs to prioritise diversity in order to grow, say speakers
Progress in the industry is incumbent upon increasing diversity,said panellists.
In a discussion focused on client insights and perspectives, speakers agreed that more work is required to diversify the workforce in securities lending.
Using the turnout of the room as an example, Brittany Gallagher, director of operations at K2 & Associates, highlighted the necessity of increasing the number of women in the industry.
“It is the responsibility of larger institutions, but on a personal level, it is down to us,” she explained.
Meanwhile, Kyle Kolasingh, head of Market Services Solutions at RBC Investor Services, argued that firms need to build a greater awareness of disability and accessibility, focusing on neurodiversity in particular.
“If you want the industry to continue to grow successfully, you have to focus on fostering talent and its sustainability. You cannot do this without acknowledging and incorporating diversity, equity and inclusivity goals in hiring practices,” he argued.
Brendan Eccles, managing director, global head securities lending at Scotiabank, affirmed Kolasingh’s comments, arguing that this work was “imperative”. He acknowledged, however, that few people in the industry had done that research, and that investment firms do not necessarily have the resources in place.
Elsewhere, speakers discussed the importance of adapting to market changes and optimising trading and investment strategies.
They discussed the need for understanding client perspectives, with panellists emphasising the more active roles clients are taking with their return strategies.
As one panellist argued, it is vital for clients to know what they are up against. He detailed the huge focus his firm is placing on increasing transparency across the securities lending chain.
“For us, it's about being nimble,” he explained. “We need to try to make sure that we have as many options across the street as possible when it comes to foreign stock or financing needs.”
CASLA was created with a mission of ensuring the long-term viability of the Canadian securities lending industry by establishing a unified voice. Its membership includes over 20 firms in Canada and the US across broker-dealers, asset managers, custodial banks, prime brokers, and technology providers.
Below, Securities Finance Times provides highlights of the event’s key discussions. Canada is underdeveloped and must rethink collateral approach
The Canadian market requires improvement, especially in terms of repo and collateral, according to panellists at the CASLA conference in Toronto.
The panel discussed post-trade challenges in the session entitled ‘Market Infrastructure Revolution: Navigating Post Trade Challenges and Partnering in Industry Transformation’.
Moderated by Steve Everett, head of business strategy and Post Trade Innovation at TMX, panellists agreed that the Canadian market requires improvements in the collateral space.
According to Nick Chan, managing director, head of financial resource management at BMO Capital Markets, “Canada is unique”.
“When I look at how we operate compared to other jurisdictions, we tend to come through things by collaboration, discussion and standardisation,” he added.
Triparty was not a term that was known to local Canadian participants until very recently, said Chan, who believes that this has come from “the fact that we have had good access to well-developed funding markets that did not rely on us to have much collateral reuse”.
During the discussions, Chan indicated that collateral has become a core part of the way the Canadian market manages risk. In the area of collateral reuse, he believes that “we have been underdeveloped, and there is an opportunity to evolve”.
He continued: “The Canadian market has been very resilient, but there is an opportunity for us to evolve the infrastructure to pave the way for more innovation and liquidity, which will lead to more Canadian market participation in the future.”
Following this topic, Maksym Padalko, operations and policy advisor at the Bank of Canada, highlighted that the country lacks a general collateral market. In addition, he stated that the term repo market could also “be more active”, and usage of Canadian collateral or securities in foreign markets, such as in the US and Europe, could be expanded.
“In terms of the importance of having the proper infrastructure, there are broad systemic benefits,” Padalko explained. “If you have a well developed term repo market, for example, and you face sudden volatility like what we have seen in the past, term repo markets can help to absorb some of those shocks — such as risks, big price moves and margin calls — in the near term.”
Adding to the debate, Value Exchange CEO Barnaby Nelson pinpointed how the “incredible costs” the industry carries everyday to support the current infrastructure in the collateral repo space, from a balance sheet, risk-weighted asset (RWA) and operational cost perspective, was “striking”. He asked: can we afford not to?
He concluded: “There is no way we can run our collateral and repos in 10 years in the same way that we do now. We are just entering the triparty era in Canada, arguably, the revolution is well advanced in Europe and Asia. It would be wrong to think we have the luxury of time.”
T+1 achieves a smooth landing following implementation
T+1 proved to be a smooth transition for the US and Canada, and now participants have advised the UK not to be afraid to “have those difficult conversations”, as the country works toward the implementation of a shorter settlement cycle.
The panel entitled ‘T+1 in the Rearview’ discussed the move to a shorter settlement cycle for the US and Canada over a week after its official implementation.
Moderated by Phil Zywot, head of North American equities and US corporates at BNY, panellists were questioned on the unexpected surprises of the transition, recalls, automation, and how the UK should handle its own transition to T+1.
It appeared that the “unexpected surprise” from the T+1 go-live was that there were no surprises, said Ahmed Shadmann, head of Agency Trading Canada and non-US equities at State Street. He added: “I was preparing for the end of the world scenario, but it was pretty smooth. The preparation paid off.”
For one panellist, there were “a few hiccups” during the transition, however, market participants were prepared and continued to monitor the move.
An industry fear regarding the potential increase in fail rates during 27-28 May “did not materialise”, confirmed Mathilda Yared, managing director of global securities finance at National Bank Financial.
The panel agreed that the transition to T+1 brought the industry together, as firms participated in “an immense amount of collaboration and discussion”. However, one panellist in particular said that T+1 may be in the rearview, but it is a long road ahead. He advised firms to remain vigilant and to not become complacent.
In April, the UK government gave the go-ahead for the country to move to a T+1 settlement cycle. This journey will be led by the Accelerated Settlement Taskforce (AST), with the aid of its Technology Group, which aims to implement T+1 no later than the end of 2027.
Offering advice on the UK’s T+1 implementation, the panel noted that firms should not be afraid to have “those difficult conversations”. Companies should partner with all of the respected firms, leverage their vendors, and listen to the solutions that are out there.
Alexa Lemstra, director of client relationship management at EquiLend, encouraged the UK to “get a head start” as deadlines will “come up quickly”.
She continued: “Use the budget and focus of the deadline to look at your full lifecycle and understand where you can find more efficiency. Participants will be moving into a real-time environment, and so they will need that risk mitigation view, transparency and visibility in the back, middle and front office. Everyone needs to move quickly to handle any exceptions coming out.”
In conclusion, Yared said: “Partnerships between borrowers and lenders is extremely important. The UK needs to establish that line of communication, even if it is difficult.
“Take a look at the available market infrastructure. Maybe what you want to achieve as an industry with the currently available infrastructure is not possible, but there is no reason why firms can’t get together and put something in place that will help reach the needed end result, like we did in Canada.”
The market faces challenges with regulatory definitions
Regulatory requirements need to be much clearer, agreed panellists at the CASLA conference.
The panel discussion, titled ‘Regulatory Discussion: Who is Drinking and Who is Paying?’, applied a Croatian phrase to the subject of regulations, typically denoting a confused and disorganised situation.
In light of current regulations, particularly Basel III Endgame and the US Securities and Exchange Commission’s (SEC) 10c-1a, the speakers concurred the phrase was apt.
Focusing on the Basel III Endgame, the panel outlined key issues that the regulation has created for banks.
Firstly, they discussed potential problems with defining investment grade counterparties under Basel III Endgame, and how narrowing this definition could impact capital treatment of certain assets.
The session also discussed concerns from beneficial owners regarding the operational risk framework, highlighting the additional demands it will place on overall bank balance sheets by assigning additional capital requirements based on stress testing results.
One panellist specifically noted increases in market risk, pointing to challenges for firms’ business model, operations, as well as for franchise optimisation.
When questioned on whether the regulation really would be the ‘endgame’, one speaker was dubious. They did, however, acknowledge that the collective impact of the regulation would highlight some of the gaps within market infrastructure that could be built on.
Discussion then moved to consideration of 10c-1a, highlighting the numerous questions that the regulations are yet to answer.
For example, questions remain around what constitutes a 'reportable event' and how much new development work will be required from existing SFT reporting systems.
Likewise, speakers explained that questions of jurisdiction still persist, and that there could be a potential overlap with Securities Financing Transactions Regulation (SFTR) requirements. In essence, they suggested, there needs to be significantly greater clarification regarding these reporting requirements.
As the panel concluded, discussion reverted back to the opening title: who will be drinking and who will be paying?
For one panellist, the issue comes down to capacity. The Canadian market might have some success, they posed, arguing that the size of the US Treasury clearing model might take a while for everyone to have sufficient access to it.
Getting new standard documents that are modern and useful for this purpose is going to be really important, the panel noted.
The speakers expressed being unsure if they can get there in preparation for implementation of these rules, or at least in a way that is generally useful for the market at large. But they are trying really hard to make that happen.
Industry needs to prioritise diversity in order to grow, say speakers
Progress in the industry is incumbent upon increasing diversity,said panellists.
In a discussion focused on client insights and perspectives, speakers agreed that more work is required to diversify the workforce in securities lending.
Using the turnout of the room as an example, Brittany Gallagher, director of operations at K2 & Associates, highlighted the necessity of increasing the number of women in the industry.
“It is the responsibility of larger institutions, but on a personal level, it is down to us,” she explained.
Meanwhile, Kyle Kolasingh, head of Market Services Solutions at RBC Investor Services, argued that firms need to build a greater awareness of disability and accessibility, focusing on neurodiversity in particular.
“If you want the industry to continue to grow successfully, you have to focus on fostering talent and its sustainability. You cannot do this without acknowledging and incorporating diversity, equity and inclusivity goals in hiring practices,” he argued.
Brendan Eccles, managing director, global head securities lending at Scotiabank, affirmed Kolasingh’s comments, arguing that this work was “imperative”. He acknowledged, however, that few people in the industry had done that research, and that investment firms do not necessarily have the resources in place.
Elsewhere, speakers discussed the importance of adapting to market changes and optimising trading and investment strategies.
They discussed the need for understanding client perspectives, with panellists emphasising the more active roles clients are taking with their return strategies.
As one panellist argued, it is vital for clients to know what they are up against. He detailed the huge focus his firm is placing on increasing transparency across the securities lending chain.
“For us, it's about being nimble,” he explained. “We need to try to make sure that we have as many options across the street as possible when it comes to foreign stock or financing needs.”
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