Global Investor/ISF sec fin events review 2012
Around the world, Global Investor/ ISF’s securities finance conferences
enjoyed continued success in 2012. The Securities Finance Asia Pacific Master Class
, held in Sydney in May, brought together securities finance participants including beneficial owners who discussed the evolving nature of securities lending
Kyle Ringrose, head of investment operations, QSuper, said Super funds typically use a master custodian so would probably engage with securities lending programmes through that relationship. However, he added he would not be surprised to see Super funds creating their own in-house securities lending programmes.
Rob Chiuch, managing director, securities lending, BNY Mellon Asset Servicing, said there was a change in appetite particularly in the US market for non-cash collateral versus fixed income transactions, “double-digit increases in non-cash collateral on the fixed income side, partially attributable to risk appetite and lack of return on the reinvestment side”.
Sinclair Scholfield, head of securities finance for Australia and New Zealand, State Street, posed a central question, from a risk-reward point of view, of whether securities lending is a worthwhile activity for Super funds
Scott Malpass, investment officer, AvSuper Fund, which engages in margin lending, said: “My directors and my members are quite adept at handling risk. They look at risk every day. As long as you can quantify it they are quite happy to do it.”
Jo Leaper, consultant at Jana, said the only asset class she would not advise to lend would be emerging market fixed interest due to “extra risks, additional custody and operational risks – just in trading, without lending”.
At the Synthetic Finance Summit II in June
, hedge funds gathered in London to learn what the future holds for synthetic products
. John Redwood, member of the UK parliament and co-founder of Evercore Pan-Asset, compared regulatory approaches of the past, present and future. He said that prior to the eurozone crisis regulators “failed to see the obvious” because they focused too much on the detail, and that “synthetics were part of the story”.
Penny Miller, managing associate, Simmons & Simmons, pointed out that while there has been much attention on the mandatory central clearing of OTC derivatives, less focus has been directed at the challenges for derivatives that will not be subject to central clearing under the Emir. On current and future trends in synthetic financing, Matt Boyd, director at BlackRock, said the asset manager has moved into the futures market and away from certificates and total return swaps. “We look for synthetic products for two reasons.
The first is that it is difficult to trade in the cash market due to regulatory and tax reasons.” The second reason is that investors are looking for yield products at a time when both bond and dividend yields are down, and synthetics have a performance offering that can give them that yield. Jon Aikman, author of the book When Prime Brokers Fail pointed out that some hedge fund managers have been increasingly relying on synthetic products post Lehman Brothers collapse.
In Brazil, at the Securities Finance Master Class IV Latin America
in July, chairman Rob Philippa, head of international operations, BTG Pactual, set the tone of the day by highlighting the one factor influencing securities finance in Brazil above all others – steadily falling interest rates.
Philippa suggested that asset owners would be more tempted by the fees from lending stock now that conventional returns from assets have decreased.
Delegates also heard that the traditional dominance of fixed income in Brazil
may be on the verge of being challenged by alternative asset classes
, with hedge funds particularly set to benefit.
Eduardo Moreira, partner, Plaural Capital, said lower growth has cooled the inflationary process and given policy- makers more room for manoeuvre. This should allow the real interest rate to remain below 3% for the next six months, which would mean “everything changes and create real momentum in some asset classes”. Reduced interest rates
have left equities relatively attractive. Moreira said stocks that have maintained high dividends, of around 7%, are particularly undervalued [as such returns are no longer in line with declining returns from fixed income]. Securities lending has huge potential for growth in Brazil
– but there is a need and an opportunity to improve the way the structure works, said Carey Chamberlain, head of equity finance in Latin America, HSBC.
“The central counterparty structure that Brazil has adopted is working very well.” However, the single biggest hurdle in developing securities lending in Brazil is the lack of interest from asset owners such as pension schemes, according to Delfos Machado, head of Latam equities trading, HSBC.
In late August speakers decided at the German Securities Finance Summit
that regulators are making the financial system less stable and investments less profitable.
Godfried De Vidts, chairman of the European Repo Council, opened the summit in Frankfurt by reflecting on the state of the German repo and securities lending markets
. He was skeptical over calls from regulators to introduce trade repositories, saying that it would be “challenging to create the data and make good use of it” and that there was a “risk of overburdening the industry”.
He added: “Repo is becoming a very political subject – regulators want to tell us what to do and I’m very concerned about this.”
Arne Theia, head of repo and collateral trading at UniCredit, described the sentiment of the market: “Both the banks and beneficial owners are still sitting on liquidity due to the low interest environment and fears of a eurozone break-up.”
Laurence Marshall, chief operating officer at EquiLend Europe, said one of his big concerns was whether collateral transformation
trades would be allowed by regulators in the future, pointing towards the continuing reviews on the shadow banking system.
Accepting cash as collateral was cited as a potential solution to the problem by Steffen Jordan, head of SEB Enskilda Equities Germany, SEB. But he said that while a lot of lenders are considering accepting cash, this is not yet happening in the German market.
Panelists at CEE Securities Market Summit in Poland
in September discussed the role of securities finance in the development of the country’s capital markets. KDPW – Poland’s central infrastructure institution responsible for the management and supervision of the depository, clearing and settlement system – plans to introduce a securities lending platform before the end of the year.
At the event, Izabela Olszewska, director for market development at the Warsaw Stock Exchange, said that “although the heated discussion goes on around short selling
, we think that well organised and monitored short-selling has many benefits for the market and its participants”.
Olszewska added: “We are preparing the launch of universal trading platform technology at the exchange, a competitive system used by NYSE for example, which will allow us to attract new types of investors and launch new products such as single stock options.”
She stated that the exchange will try to get institutional investors to become more active in removing more market barriers and facilitating securities lending
Tax issues and managing counterparty risk are key challenges to the development of securities lending in Poland
, said Jacek Mierzejewski, chairman of the Polish Custodian Banks Board.
Marek Wierzbowski, partner, vice chairman of the Supervisory Board at the WSE, said that Polish law does not recognise different types of owner, especially beneficial owners, and this limits the participation of Polish pension funds in securities lending.
At the Middle East Summit held in Qatar in October
, panelists named Egypt’s short selling among Mena exchange improvements.
Amr Elalfy, head of research at Mubasher, said talks have continued for five years concerning short selling in Egypt
and “very soon the stock exchange will be introducing ‘halal’ short selling, allowing investors to sell some of their shares that are settled at the beginning of the day and buy them back at the end of the day”.
The development of securities lending
in the Middle East depends on help from foreign banks and local institutions that are already engaged in lending, said Dimitri Arlando, head of business development at State Street.
Arlando added that local sovereign wealth funds should contribute something to further the market’s development, and pointed out that there are a number of institutions in the region that do not lend at present.
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