The securities lending landscape is complex and constantly evolving, making it both a challenging and rewarding area to monitor. Market volatility, along with seasonal factors, can present fleeting opportunities that require swift action.
Australia-based superannuation fund Aware Super works to maintain consistent and open communication with market participants to stay informed of emerging trends and to identify these potential opportunities, ensuring it is well positioned to capitalise by extracting further value from its inventory.
While the fund finds success in enhancing capabilities to navigate prospects arising from bank balance sheet constraints, including funding and capital challenges, the team at Aware Super also looks to capture opportunities that demand flexibility in collateral acceptance.
For Henry Trinh, associate portfolio manager at Aware Super, pension funds have long been a cornerstone of the securities lending market due to their role as a stable source of supply.
“With their long-term investment horizons and large, diverse asset portfolios, they often serve as an anchor, offering stability and committed supply that counterparties can access at scale. Over time, their role and presence in the market have evolved significantly.”
Beneficial owner programmes
At Aware Super, securities lending has “always played an important role” as a value-add that complements the fund’s broader investment strategy. Within its markets function — which is responsible for managing portfolio execution, exposure management, and portfolio financing — securities finance is fully integrated into its approach to generating returns for members.
Speaking to Securities Finance Times, Trinh highlights: “A key aspect of our securities finance programme is that it’s embedded in the front office, managed by investment professionals, in concert with personnel who look after the management of the fund’s cash, fixed income and equity portfolios, ensuring that we can make timely, informed decisions in line with our overall investment objectives.”
He believes that this integration “goes beyond just executing positions”. Working closely with public market portfolio managers, the fund looks to identify and leverage opportunities in the securities lending space that may impact their positions.
The benefits from entering securities lending programmes for beneficial owners are broad and largely stem from increasing proximity to the underlying assets being managed, says Trinh, coupled with taking greater control with active decision making.
Breaking down the benefits, Trinh highlights a number of key points. First, these programmes provide a source of enhanced returns by providing an additional revenue stream incremental to market returns generated from holding the public market securities.
Secondly, depending on how much flexibility and discretionary activity is integrated within the programme, it can provide access to additional sources of liquidity and funding. Finally, the scalability of strategies and diversity of market participants involved, create opportunities to tactically position for market dislocations within global funding markets.
Reviewing the fund’s securities lending programme, Trinh says it has “evolved significantly” to stay competitive and aligned with the changing dynamics of the global market.
“As an institutional investor, we manage a diversified portfolio of public market securities and actively generate value through our securities finance strategies. Initially, our programme was more passive and indemnified, relying exclusively on physical format trades implemented through an agent lender,” he explains.
However, to meet the increasing demands of the market and improve overall outcomes, the fund has made significant advancements.
Aware Super says it has strengthened its internal risk management framework to be more robust and global in scope. Additionally, it has transitioned to an un-indemnified model that uses both physical and synthetic formats to implement a range of securities finance strategies. This shift aims to enhance revenue generation and plays a vital role in improving fund liquidity, offering a more flexible and responsive approach to market conditions.
Breaking barriers
Previously, pension funds were more passive participants, but have now become increasingly sophisticated, Trinh explains. Some now have larger, more focused teams equipped with mandates to pursue active strategies, by building in-house capabilities, that create tangible value for their members.
Many pension funds have also established international footprints, he adds, enhancing their proximity to global markets and deepening relationships with all participants within the securities financing ecosystem.
However, these funds are not operating without barriers to market. From an Australian-based superannuation fund point of view, Trinh says challenges are centred on the “well-defined regulatory environment that we operate in”, alongside the constraints of the Australian Eastern Daylight Time (AEDT) time zone with respect to the European and American markets.
Trinh continues: “Compared to many of our global peers, we need to uphold strict compliance with regulation designed for the local superannuation fund community, that places constraints on the fund’s ability to take on leverage and specific use of synthetic trades involving domestic equities.”
This, combined with operating in an “unfavourable” time zone, creates challenges for Aware Super to build its footprint and deepen relationships in the market for US collateral-aligned opportunities.
“We respond to these barriers by focusing on areas of the portfolio, where we retain a competitive advantage to deliver outperformance and have the greatest discretion,” he adds.
Looking forward
Looking forward, Aware Super has several core priorities over the coming 12 months. For example, the fund has an appetite to look at pursuing innovative ideas that require collaboration with a large beneficial owner in emerging areas such as cleared securities financing trades.
Another priority is to automate some of its existing processes by working closely with its agent lender and collateral manager, Trinh explains. He believes this will help the fund broaden the opportunity set it can access by considering different trade ideas and continuing to refine the areas where it has identified a competitive edge.
Above all, a key focus for Trinh is to remain the first port of call for borrowers in the market. Particularly for those who are interested in partnering with Aware Super on structured trades that address different areas of focus, whether it be revenue generation or optimising the deployment of fund liquidity.
From an Australian superannuation fund perspective, Aware Super’s purpose is driven by the objective to improve member outcomes. It looks to maintain a close relationship with members “compared to other pension fund markets”.
“This is particularly so when engaging in securities finance trades as we right size our risk appetite, being mindful of the impact on member outcomes. We aim to be the first call for new ideas, but it is not an automatic yes to every proposal,” Trinh notes.
“We recognise the privilege of managing our members’ retirement savings, and this responsibility guides our decision making as we evolve our programme over time.”
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Image: Henry Trinh 
