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Feature

Canadian confidence


28 May 2019

Rob Ferguson of CIBC Mellon discusses Canada’s securities lending market and how it continues to enjoy a well-deserved reputation for stability and strength and why the future remains very bright

Image: Shutterstock
With the Canadian Securities Lending Association (CASLA) hosting its annual conference in Toronto at the end of May, we are pleased to see interested stakeholders global and local coming together to discuss the latest trends in our market. In many ways, “the more things change, the more they stay the same”; Canada and its securities lending market continue to enjoy a well-deserved reputation for stability and strength, built on a foundation of experienced market participants, proven infrastructure, and a prudential regulatory regime that works in collaboration with market participants. These longstanding hallmarks of Canada’s financial markets continue to drive value for market participants, even amid the rise of technology and market changes that are helping drive efficiency and results across the securities lending investment cycle.

Collateral is a central area of focus across the beneficial owner, borrower and agent lender communities. The demand for high-quality liquid assets (HQLAs) to backstop trading activities means that Canada’s ongoing status as one of the few nations with a triple-A rating fosters a deep appetite for Canadian federal debt, as well as other high-quality instruments such as provincial bonds. There is an ongoing demand for collateral transformation activities as market participants seek to meet the rising needs of their stakeholders and counterparties. In keeping with this, growing sophistication among beneficial owners seeking to generate additional alpha has paved the way for expanding collateral flexibility—a key differentiator between owners seeking returns.

The Canadian securities lending market historically has almost entirely comprised sovereign debt non-cash collateral, but as market participants and regulators have evolved their positions and thinking over time, collateral usage has diversified across a greater spectrum of sovereign debt, equities and cash. Today the markets demonstrate a healthy appetite for equity collateral, a growing need for corporate bond collateral and demand for more global sovereign fixed income options. In one notable trend, many collateral flexibility conversations have turned to currency rather than asset class, and we are seeing expansion from collateralisation using traditional US Dollar, Euro and Canadian Dollar to include the British Pound, Japanese Yen and other global currencies.

We are pleased to say that beneficial owners seem more engaged than ever; working in close collaboration with their securities lending providers to identify new incremental revenue opportunities and other opportunities to unlock value from their securities lending programmes. The engagement goes hand-in-hand with rising in-house expertise and comfort around securities lending activities, with beneficial owners participating actively in discussions regarding opportunities to fine-tune their programmes or to take on more complex opportunities as they arise.

Increased engagement and sophistication among beneficial owners also brings a renewed appetite for robust reporting and collaborative communication to meet the needs of boards and other stakeholders for confidence and risk oversight. This is a key area of focus as we support beneficial owners in their move up the sophistication spectrum; today we are providing tailored materials, relevant briefings and insights to help beneficial owner stakeholders deliver value for their organisations and educate their internal stakeholders. Certainly, at the aforementioned CASLA conference, we will see a strong mix of agent lenders, borrowers, owners and perhaps even a few representatives from Canada’s regulatory bodies—who come to join the conversation, learn more about our industry and engage with participants in a collaborative manner.

As with many global jurisdictions, we continue to see evolution in the Canadian regulatory environment. Canada has historically been a highly complex regulatory environment, with 13 provincial and territorial securities regulators. In recent years, however, the federal government and several provincial stakeholders have undertaken efforts to create a common securities regulator across Canada, the Cooperative Capital Markets Regulatory System. This initiative by the governments of British Columbia, New Brunswick, Ontario, Prince Edward Island, Saskatchewan, Yukon, Canada’s federal government, and—as of April 2019—Nova Scotia, has the stated goal of helping protect investors, enhancing Canada’s financial services sector, supporting efficient capital markets and strengthening the management of systemic risk.

Collateral is at the heart of one regulatory focus area, as current regulations—Canada’s NI 81-102—do not allow mutual funds to take equities as collateral, nor can mutual funds go out more than three months on the reinvestment curve. Both of these provisions have the potential to disadvantage mutual funds versus pension plan sponsors and insurance companies, which are not subject to the same restrictions. This is an area where the Canadian Securities Lending Association has been engaging with regulators to seek a more level playing field for mutual fund companies.

Another key regulatory development in Canada is the advent of liquid alternatives offerings with the liberalisation of regulatory controls to open up alternative asset classes (such as real estate, infrastructure, private equity, private debt and hedge funds) to a broader spectrum of investors—bringing in new participants as well as new providers into the market. As retail investors gain knowledge and confidence, there is potential for associated growth in the securities finance market over the years ahead. Key themes in the liquid alternatives segment include collateral diversification and collateral expansion, as fund providers move to meet demand. This collaborative engagement between market participants, regulators and other stakeholders is yet another example of the strong relationships that underpin Canada’s marketplace.

On the equity front, Canadian equities have remained steady from 2018 as we continue to see demand from investors looking to shape their exposures to Canada’s evolving healthcare sector. We have also seen some recent pickup in merger and acquisition activity in the resource sector—a key driver given the relative portion of Canada’s economy linked to natural resources.

In the securities lending marketplace, just as in many other segments in the financial services sector, technology innovation continues to be a key focus area. Current efforts in the market include a heavy focus on driving efficiencies, including expanded auto-borrow capabilities that free traders from certain manual processes and enable them to focus on value-add alpha generation opportunities, activities and strategies. As in so many aspects of our business, we see automation as a “good jobs” strategy: the tasks most suited to automation are typically the most straightforward, predictable and repetitive tasks. For example, operational technologies such as auto-return features and contract compare help streamline processes and further mitigate the potential for errors while freeing traders to focus on client service and more complex activities where they can deliver value and impact for beneficial owners and borrowers.

This is perhaps the most important change and trend in our industry here in Canada—even as we drive new technologies, innovations and efficiencies through our business to benefit our clients, companies and stakeholders, the focus remains on the positive difference that talented people can make in delivering results.

Overall, the future of Canada’s securities lending market remains very bright, and I think participants across the market continue to engage effectively with clients, regulators and one another. It’s a great time for Canada’s market and I am looking forward to what lies ahead for Canada.
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