Look offshore to maximise your lending potential, say MUTB’s Global Securities Lending Solutions team Paul Collard, James Aris and Reshad Mullboccus
As a global lender, the Global Securities Lending Solutions (GSLS) team at Mitsubishi UFJ Trust and Banking (MUTB) has a mantra that says one of our key roles is to find the demand for our client’s securities wherever that demand exists in the world.
That requires our traders to scour the global markets to identify demand and to generate revenue on as many asset classes as possible, even if they are far removed from the trader’s geographical location. Moving and lending assets to the market where there is the greatest demand has underpinned much of our success at MUTB. However, for a long time this did not include a significant amount of lending of Japanese government bonds (JGBs).
For as long as we can recall, JGBs have been one of the most actively traded asset classes in the world’s fixed income markets, but that was almost completely confined to their use as collateral. Various lenders have long extracted value from US Treasury portfolios by lending them against the receipt of JGBs as collateral. However, for clients with long positions in their portfolios, achieving lending revenue remained little more than a pipe dream. That is, until now.
Demand for JGBs started to increase early in 2023 and it has continued to pick up pace since the start of the year with a large number of JGBs currently in demand from multiple borrowers based outside of Japan. The initial driver for this demand emerged from a change of interest rate policy at the Bank of Japan (BOJ) in December 2022. This change in BOJ policy spurred borrowing demand for JGBs, especially for bonds with a maturity between 5-years and 10-years, as well as for bonds deliverable into the futures contracts. As many as 20 to 30 different JGBs are now in demand, with a range in value from 10-30 bps.
Some sources of supply cannot mobilise their JGB holdings due to the operational constraints of lending in the Japanese time zone. Adapting a lending model to overcome those constraints is vital — and to capture the value in JGBs, the lending agent’s operational set up is crucial. The key is quite simple and involves lending the in-demand securities in the domestic Japanese market, in the Japanese time zone with the collateral being received prior to the loaned security being delivered to the borrower.
Domestic settlement in the time zone is key. Where collateral needs to be delivered in Euroclear, as is the case with many lenders, this adds a complication that prevents same day settlement of both legs and this removes nearly all of the opportunity to lend.
Significantly, the demand for JGBs seems to be holding steady and, for the first time in our experience, we are starting to see JGBs offer a good degree of potential for lending.
For the first time, we are finding ways of mobilising those JGBs that are not seeing any level of special demand. Structuring transactions against other collateral is allowing us to generate revenue even on the most GC JGB. Borrower selection, collateral eligibility and tenor of the transaction is key, and that key unlocks additional revenue. Coupled with the specific issue value, you can start to see a compelling case for international lenders to be tasked with what has hitherto been a dormant asset class.
That compelling case is only strengthened when paired with the value in lending Japanese stocks. That lending market is much more established but, once again, international lenders are perfectly placed to generate additional revenue that cannot necessarily be found in the domestic market.
Market outlook
Looking ahead to 2024, the Japanese stock market appears poised for success, driven by a combination of strong economic growth and noteworthy changes in corporate management practices facilitated by the Tokyo Stock Exchange (TSE). The TSE’s proactive approach in encouraging listed companies to enhance their value and profitability via increased dividends and share repurchases adds a significant boost to the overall positive prospects for the market.
In addition to these changes, the introduction of the new Nippon Individual Savings Account (NISA) programme in January 2024 is expected to further fortify the stock market. This initiative is likely to attract more local investors looking for alternatives to low-interest bank deposits, potentially expanding the investor base. The combination of economic growth, improved corporate management practices and greater investor participation creates a favourable environment for the increased securities lending activities in Japan for 2024.
To make the most of these opportunities, MUTB GSLS will work closely with clients to boost revenue. Just as we do for JGBs, we will use our position as a global lender to generate revenue from Japanese equities by sourcing and fulfilling demand outside of the domestic market. That allows us to utilise a client’s portfolio to its full potential by smartly using a combination of different forms of collateral and trading structures to tap into global demand through our trading desks in all regions.
This global approach makes a compelling case for clients to look outside of the traditional, domestic markets to generate revenue on their portfolios. Global lenders can offer more options and, crucially, this can lead to additional returns and stronger performance than can be achieved by lending solely in a local market.
