Marney McCabe and Tom Poppey, who are six months into their roles as co-leaders of the securities lending practice at BBH, discuss a wide range of topics such as assuming responsibility for a business during a global pandemic, how they are engaging with clients to meet their business goals, and their outlook for the lending industry
What can you tell us about the transitions into your new roles and the impact of COVID-19 on your leadership?
Tom Poppey: We were fortunate to assume leadership of a business that is fundamentally strong with clear differentiation and a great team across the globe. Furthermore, we have worked together for over 12 years both in the securities lending business and at BBH. This enabled a smooth transition given our significant knowledge of our product, clients, and strategic direction of the business.
Unexpectedly, our first order of business was to facilitate the global team’s transition to remote working without interruption to our clients and borrowers. We were really pleased how quickly this was achieved while in the midst of significant market volatility.
Marney McCabe: COVID-19 has forced us to be increasingly creative in how we engage with our teams. We have increased the frequency of check-in, or ‘pulse’ meetings, to promote clear communication. As a silver lining, remote working has enabled us to get our global colleagues together around the virtual table more often.
What is your business strategy and how has it changed in the current environment?
McCabe: We have enjoyed a very clear business strategy since the inception of our programme in 1999. We aim to generate superior risk-adjusted securities lending returns for a limited number of sophisticated asset managers and institutional investors. We seek to achieve this through a highly-customised lending experience delivered through our service and technology.
The business strategy is governed by a desire to provide clients what we refer to as “TCO” – transparency, control, and optimisation. While transparency has long been a feature of the lending industry, the emergence of ‘big data’ is providing an increasing opportunity to elevate what we can provide to clients. As the party involved in the buy and sell decisions for securities, asset managers require a high degree of control over how their lending programme is structured, examples of which include minimum fee thresholds, environmental, social and governance (ESG) compliance needs, and specific collateral preferences, to name a few. Our clients seek optimised, not necessarily maximised, lending returns in accordance with their risk and operational preferences. Ultimately, our ability to deliver TCO is enabled by the underlying technology supporting the business.
Poppey: Securities lending is one of the last bilaterally traded products in the marketplace. As the industry moves to more automated platforms, our strategy is predicated on our trading prowess. We are investing to translate all the distinctive components of securities lending — such as our approach to fee negotiations, collateral flexibility, and importantly, specific lender and borrower requirements – into modern and intuitive technologies.
Can you talk more about your specialisation in partnering with asset managers?
McCabe: Our programme, by design, is principally focused on asset managers. What this means is that we have developed an extreme focus on the considerations and preferences of how asset managers engage in securities lending. What we find is that our asset management clients are not looking to bear unnecessary risk in search of every last fraction of a basis point and prefer a more conservative collateral set. Their goal is to generate incremental risk-adjusted returns which can help improve the overall performance for their investors.
Additionally, we find that our clients view BBH as an extension of their organisation regarding all matters securities lending. Our specialisation influences our digital products, trading practices, and regulatory expertise that is not distracted by multiple lender types.
BBH is selected as lending agent on merit, resulting in our business being a broad mix of custody and non-custody clients. While we happily partner with our custody clients to help elevate their performance, we equally work with clients and multiple custodians for over half of our business. We are able to do so through a flexible operating platform and team that appreciates the distinctive processing needs of different custodians.
Are there ways that technology is already changing how you interface with clients and borrowers?
Poppey: We work to make sure we meet our clients where they want to be in terms of technology. Whether it is accessing data through online portals, receiving data through application programming interfaces, or more traditional reporting, our primary objective remains surfacing the information that is most pertinent to our clients.
Marney mentioned the importance of being nimble given the dynamic nature of the securities lending business. The industry is moving toward higher levels of automated trade execution. In addition, with the increase of lendable supply, we engage with borrowers to optimise distribution channels without sacrificing performance. Our objective is to achieve incremental gains in automation by incorporating the proprietary trading practices that we have developed over time into modern and flexible technologies.
Finally, interest around emerging technology, such as artificial intelligence or machine learning models, continues to rise. While we do see this as an opportunity, we are being thoughtful around its potential benefit to the business, rather than entering the space simply to gather a headline.
What are your thoughts on asset managers’ focus on ESG investing and how that impacts the industry and your product strategy?
Poppey: ESG is definitely catching the attention of many in our industry and there is a clear nexus with securities lending because when shares are on loan, you lose your right to vote proxy for those shares. Depending on the client’s collateral preferences, there also may be a need to screen securities for ESG criteria. We have, and continue to, extend our capabilities that allow our clients to meet both objectives of adherence to ESG principles and participation in securities lending. We work closely with our clients to understand their ESG models and to create a securities lending programme leveraging data and technology that can coexist with their models. It’s highly customised and often automated, enabling their shareholders to continue benefitting from securities lending, recall securities when needed to vote proxy, and ultimately deliver on an investment strategy focused on sustainability and social governance.
You have more than three decades of experience in securities lending between you. What are some of the biggest trends that could impact the industry moving forward?
McCabe: Securities lending is a dynamic industry, despite its maturity and reach. Lending supply is at a historic high, but borrower demand has been growing at a slower pace as the industry is impacted by both cyclical and secular change. It is more important than ever that BBH, as the lending agent, is making appropriate investments in light of this imbalance. There is little doubt that supply will continue to grow as institutional investors become increasingly familiar with the practice and funds search for additional returns in a hyper-competitive environment. The challenge for agent lenders will be to pursue strategies that maximise distribution to capture as much demand as possible.
Poppey: The agenda for the industry has largely been dictated by global regulators over the past 10 years, but that is starting to change. This provides an opportunity for market participants to focus their energies on revenue producing activities while achieving greater scale and efficiency through emerging technology.
When taking a step back to view our industry objectives, it’s easy to see the fundamental trends that point towards growth. Exchange-traded funds and cross-border funds, both of which historically have widely accepted lending as a strategic imperative, are growing rapidly. The ultimate consumers of borrowed securities, alternative and hedge funds, continue to enjoy positive growth as investors search for return. And securities lending and financing enjoys great scale as typified in the global loan balance, which provides fertile ground for specialisation. It’s a bright future.
