The lender’s perspective
03 September 2019
Mick Chadwick, of Aviva Investors, discusses the current securities lending market and talks through the likely hot topics for this year’s IMN conference in London
Image: Shutterstock
Can you outline your securities lending programme and how it has performed in the past 12 months?
Aviva Investors has around £350 billion-worth of assets under management worldwide, on behalf of both the Aviva Group and external institutional clients. The objective of the securities lending programme is to generate low-risk incremental revenue for our clients’ securities portfolios, leading to improved investment performance. Our broader securities finance mandate encompasses a range of collateralised financing solutions, including repo/reverse repo trade execution and, increasingly, collateral management solutions for our derivatives franchise.
Securities lending programme revenue during 2019 so far is down slightly compared with last year. This is largely an industry-wide phenomenon, although changing some of our fund structures has also led to some ‘frictional’ revenue decline. The good news is that we anticipate increased revenue over the coming six to 12 months as we onboard additional, previously untapped, supply into the lending programme.
From a beneficial owner’s perspective, what are the main industry trends impacting you today?
The industry trends impacting us are the same as for most of the beneficial owner and asset management community. There’s a focus on improved efficiency and market transparency, plus much more granular transaction reporting, as exemplified by the pending Securities Financing Transactions Regulation (SFTR) reporting obligation. At the same time, there’s a much greater awareness of the importance of the securities lending revenue stream given the ongoing cost pressures faced by the asset management industry. In addition, given the significance of securities lending as part of the broader collateral ecosystem, the ability to leverage our collateral management expertise and infrastructure to meet our clients’ needs is increasingly acknowledged and appreciated by our clients and colleagues.
How are today’s economic challenges affecting the approach and revenue streams of beneficial owners and what could new routes to market be?
We continue to explore all possible trade ideas and routes to market in order to maximise opportunities for our clients. In terms of new trading structures, in the short term the initiative where we’re seeing the most traction is the use of collateral pledge arrangements as an alternative to the traditional title transfer structure. While pledge isn’t a solution for every beneficial owner, it is an option for the largest, most engaged and sophisticated clients who account for the majority of our programme supply. In the wake of the introduction of more standardised documentation in this area, as sponsored by the International Securities Lending Association, we’ve seen an acceleration of the dialogue with various borrowing counterparty banks keen to explore this solution.
It has been said that securities lending is no longer just a way to cover operational costs and has emerged as a vehicle to capture alpha. Do you agree?
Absolutely! We’ve always regarded securities lending as a source of alpha as opposed to being primarily an operational discipline. This difference in approach, coupled with our ability to leverage the institutional heft of the broader Aviva Group, goes a long way towards explaining our track record of significant investment outperformance in this product over the years. Having said this, operational excellence is still a critical success factor; the fact that we have a dedicated securities finance operations team sitting right next to the trading desk continues to be a strong positive differentiator for our lending programme.
Do you feel that historic concerns around the need for HQLA collateral and indemnification have shifted at all?
Obviously there’s a positive correlation between collateral flexibility and lending revenue potential. The Aviva Investors lending programme has the flexibility to allow our institutional clients to determine their specific collateral eligibility criteria, based on their risk appetite and liquidity profile. Given that securities lending is something of a peripheral activity for most beneficial owners, they tend to be understandably reluctant to dial up their risk appetite in pursuit of some arbitrary revenue target.
As far as indemnification is concerned, our more sophisticated clients regard this as ‘nice-to-have’ rather than ‘need-to-have’. The quantum of risk in our programme is already very small, given the other risk mitigants in place, plus our track record and credentials in this area. No client of the Aviva Investors lending programme has ever lost any money from this activity in the more than 50-year history of the programme.
At a previous IMN conference, one panellist said that the industry could be heading towards a non-cash environment, what are your thoughts on this?
Cash collateral/cash reinvestment has always been less of a feature in Europe compared with the US domestic market. This is certainly the case for the Aviva Investors lending programme, given that our clients are predominantly long-only investors who don’t require leverage, cash collateral can be regarded as a headache as much as an opportunity; especially when one considers the losses incurred from cash reinvestment by some beneficial owners during the 2008 financial crisis. In the post-crisis environment, regulators are justifiably alert to any activity that can be categorised as ‘shadow banking’. As a result, even though we have the mandate to utilise cash collateral/cash reinvestment strategies for some of our larger and more sophisticated underlying clients, the nucleus of our lending programme is likely to consist of non-cash collateral for the foreseeable future.
What topics are you expecting to be discussed at the IMN Beneficial Owners’ Conference this year? Will they differ from previous years?
Some of the ‘usual suspect’ topics will doubtless get another airing at the IMN conference, such as new routes to market, including central counterparties and peer-to-peer. Regulation, especially SFTR, collateral flexibility/optimisation, and blockchain/distributed ledger technology will very likely be discussed as well. One topic that will probably see more focus this year, and rightly so, is environmental social and governance (ESG).
ESG considerations increasingly permeate all aspects of the asset management decision-making process, especially in Europe, and securities lending is no exception. It’s important that we dispel any myths that securities lending is somehow incompatible with ESG and good stewardship, particularly given the importance of an orderly and efficient securities financing market as part of the broader sustainable capital market’s agenda. Aviva Investors is a prime example of this and we occupy a position of market leadership in both ESG and securities lending and the two businesses work closely together for the benefit of our clients.
Aviva Investors has around £350 billion-worth of assets under management worldwide, on behalf of both the Aviva Group and external institutional clients. The objective of the securities lending programme is to generate low-risk incremental revenue for our clients’ securities portfolios, leading to improved investment performance. Our broader securities finance mandate encompasses a range of collateralised financing solutions, including repo/reverse repo trade execution and, increasingly, collateral management solutions for our derivatives franchise.
Securities lending programme revenue during 2019 so far is down slightly compared with last year. This is largely an industry-wide phenomenon, although changing some of our fund structures has also led to some ‘frictional’ revenue decline. The good news is that we anticipate increased revenue over the coming six to 12 months as we onboard additional, previously untapped, supply into the lending programme.
From a beneficial owner’s perspective, what are the main industry trends impacting you today?
The industry trends impacting us are the same as for most of the beneficial owner and asset management community. There’s a focus on improved efficiency and market transparency, plus much more granular transaction reporting, as exemplified by the pending Securities Financing Transactions Regulation (SFTR) reporting obligation. At the same time, there’s a much greater awareness of the importance of the securities lending revenue stream given the ongoing cost pressures faced by the asset management industry. In addition, given the significance of securities lending as part of the broader collateral ecosystem, the ability to leverage our collateral management expertise and infrastructure to meet our clients’ needs is increasingly acknowledged and appreciated by our clients and colleagues.
How are today’s economic challenges affecting the approach and revenue streams of beneficial owners and what could new routes to market be?
We continue to explore all possible trade ideas and routes to market in order to maximise opportunities for our clients. In terms of new trading structures, in the short term the initiative where we’re seeing the most traction is the use of collateral pledge arrangements as an alternative to the traditional title transfer structure. While pledge isn’t a solution for every beneficial owner, it is an option for the largest, most engaged and sophisticated clients who account for the majority of our programme supply. In the wake of the introduction of more standardised documentation in this area, as sponsored by the International Securities Lending Association, we’ve seen an acceleration of the dialogue with various borrowing counterparty banks keen to explore this solution.
It has been said that securities lending is no longer just a way to cover operational costs and has emerged as a vehicle to capture alpha. Do you agree?
Absolutely! We’ve always regarded securities lending as a source of alpha as opposed to being primarily an operational discipline. This difference in approach, coupled with our ability to leverage the institutional heft of the broader Aviva Group, goes a long way towards explaining our track record of significant investment outperformance in this product over the years. Having said this, operational excellence is still a critical success factor; the fact that we have a dedicated securities finance operations team sitting right next to the trading desk continues to be a strong positive differentiator for our lending programme.
Do you feel that historic concerns around the need for HQLA collateral and indemnification have shifted at all?
Obviously there’s a positive correlation between collateral flexibility and lending revenue potential. The Aviva Investors lending programme has the flexibility to allow our institutional clients to determine their specific collateral eligibility criteria, based on their risk appetite and liquidity profile. Given that securities lending is something of a peripheral activity for most beneficial owners, they tend to be understandably reluctant to dial up their risk appetite in pursuit of some arbitrary revenue target.
As far as indemnification is concerned, our more sophisticated clients regard this as ‘nice-to-have’ rather than ‘need-to-have’. The quantum of risk in our programme is already very small, given the other risk mitigants in place, plus our track record and credentials in this area. No client of the Aviva Investors lending programme has ever lost any money from this activity in the more than 50-year history of the programme.
At a previous IMN conference, one panellist said that the industry could be heading towards a non-cash environment, what are your thoughts on this?
Cash collateral/cash reinvestment has always been less of a feature in Europe compared with the US domestic market. This is certainly the case for the Aviva Investors lending programme, given that our clients are predominantly long-only investors who don’t require leverage, cash collateral can be regarded as a headache as much as an opportunity; especially when one considers the losses incurred from cash reinvestment by some beneficial owners during the 2008 financial crisis. In the post-crisis environment, regulators are justifiably alert to any activity that can be categorised as ‘shadow banking’. As a result, even though we have the mandate to utilise cash collateral/cash reinvestment strategies for some of our larger and more sophisticated underlying clients, the nucleus of our lending programme is likely to consist of non-cash collateral for the foreseeable future.
What topics are you expecting to be discussed at the IMN Beneficial Owners’ Conference this year? Will they differ from previous years?
Some of the ‘usual suspect’ topics will doubtless get another airing at the IMN conference, such as new routes to market, including central counterparties and peer-to-peer. Regulation, especially SFTR, collateral flexibility/optimisation, and blockchain/distributed ledger technology will very likely be discussed as well. One topic that will probably see more focus this year, and rightly so, is environmental social and governance (ESG).
ESG considerations increasingly permeate all aspects of the asset management decision-making process, especially in Europe, and securities lending is no exception. It’s important that we dispel any myths that securities lending is somehow incompatible with ESG and good stewardship, particularly given the importance of an orderly and efficient securities financing market as part of the broader sustainable capital market’s agenda. Aviva Investors is a prime example of this and we occupy a position of market leadership in both ESG and securities lending and the two businesses work closely together for the benefit of our clients.
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