Buy-side firms are relying on agent lenders to explore different avenues for accessing market liquidity as the role of securities lending changes, according to a panel titled “Industry Leaders’ Perspectives and Predictions” at the International Securities Lending Association’s (ISLA’s) Annual Securities Finance and Collateral Management Conference.
ISLA’s chief executive officer Andrew Dyson, who hosted the conference, opened the panel discussion with an interpretation of the changing landscape of securities lending. He says: "There's a traditional view around lending, that it is all about lending a specific stock to a borrower to cover a short, or whatever that might be.
“That is still a factor in what we do. But the question is, as institutional investors have had to come to terms with the world of margin in the context of uncleared derivatives, we are picking up that increasingly, lending programmes are being used to create and manage liquidity in vastly different ways. The world of lending specific stocks is still there but this is a much-reduced portion of the pie."
Accepting the alternating securities lending landscape, four speakers discussed how their operations had changed in respect of client demands.
Ernst Dolce, head of liquidity solutions at AXA IM, says the firm’s clients were focusing heavily on their securities lending performance, but over the past few years client attitudes have taken a different direction.
Dolce says: “However, for the last two years with the crisis [e.g. when the pandemic happened], we had to open the toolbox to meet their strategy — the clients are looking at what is happening when they have assets that could be used as collateral for uncleared or cleared derivatives, repo or they could be monetised. In this context, what is the best use of their assets? That is a simple question that you have to answer for a client.”
Dolce explains the importance of speaking to clients — in particular, those who are doing cleared or uncleared derivatives, repo and also securities lending — and asking what is the cheapest to deliver in the market, what can you monetise, what type of spread can you play in the market with those transactions and, where you have a liquidity trap, how can you manage that?
According to Jon Atkins, head of alternative financing, agency securities finance at J.P. Morgan, the days of “rolling up to your banking partners and asking for an unlimited, cost effective credit facility in March 2020 was just not going to happen”.
There has been an acceptance from all market participants, especially on the buy-side, that they require other ways to access market liquidity, Atkins continues, and in many firms are turning to agents to do that.
Atkins explains: “When you think about firms running bilateral repo operations themselves, and the significant cost that has been injected into that secured funding business — whether that is the result of regulatory initiatives such as SFTR, CSDR or continual cost of operational processing and fintech enabled downstream processes. It is very expensive to run it yourself, this is why they are coming to people like us as agents to say ‘we want to leverage your pipes and plumbing. Can you plug us into different liquidity providers, cleared venues, and into other like minded institutions who have slightly different liquidity access?’”
This preserve pertains not only to the larger and more sophisticated clients, but also to new participants in the market.
J.P. Morgan’s Atkins indicates that this is a trend seen across various clients for a multitude of reasons. He adds: “When you think about the new participants in our market over the past couple of years, whether that is cash rich tech corporates or neo banks — all without any legacy infrastructure to be able to engage in repo markets and lending markets — they do not want the operational burden of having to set everything up for themselves so they go to the people who can.”
Following on from these comments, Barclays’ head of equity financing trading EMEA Florian Huber says the bank is having to pinpoint solutions for their hedge fund clients’ liquidity challenges, with Uncleared Margin Rules (UMR) being a major pain point.
Huber continues: “On the other hand, to come back to the opening question about stock lending versus funding or financing, when we deal with our agent lender counterparties, it is nearly all about funding and financing. Obviously we need these particular ISINs for T+1 or T+0 and in these particular sizes; but this process is very well automated.
“However, our stock loan team spend time on finding solutions for the funding team with the agent lenders, and there we have seen a lot of good conversations and trades happening. Some of it has come out of the pandemic, but it all started before that.”
Gesa Johannsen, EMEA head of clearance and collateral management at BNY Mellon, interjects that after opening 3000 accounts during Phase 5 of UMR — the first large wave where BNY Mellon also had buy-side clients — 50 per cent of buy-side clients selected triparty rather than the traditional third-party model.
She says: “Just like the sell-side, they realised they need to optimise, they need to have an aggregate view of their inventory of assets and they need to optimise across the different bilateral trading obligations. And we see the same also with wave six.”
ISLA’s Dyson brings forth a suggestion during the crisis that some institutional investors felt let down by their providers of liquidity, from a counterparty and markets perspective. As firms reassess how they generate liquidity for various reasons, the role of securities lending is changing.
However, unanimously, the panel could not see an example of this.
Johannsen adds: “I think it is not that they are feeling let down, they are just realistic that there might be balance sheet constraints with their counterparts and that they want to broaden up their network. This is why they need to have unconflicted agents helping them on the collateral transformation side.”
