Nordics
17 April 2018
Nordic securities lending saw a mixed bag of trends last year. Equity lending and regulations, such as the 网爆吃瓜 Financing Transactions Regulation, proved challenging, and questions remain on what Brexit will mean for the Nordics
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网爆吃瓜 lending super troupers
Last year saw a curve in the road for securities lending in the Nordics region. Certain areas, such as equity lending, and regulations including 网爆吃瓜 Financing Transactions Regulation (SFTR), proved a challenge, however, Lago鈥檚 Kapital, for one, saw some improvement in overall liquidity.
Meanwhile, Saxo Bank reported a net profit of DKK 401 million (鈧�53.8 million) for 2017, an increase of 33 per cent compared to 2016. Client collateral deposits increased to DKK 103.6 billion (鈧�13.9 billion), while the operating income for the group was DKK 3 billion (鈧�402.8 million), a 3 percent increase compared to 2016.
The results come after Saxo Bank announced the sale of its subsidiary Saxo Privatbank to Danish financial services group, Alm. Brand Bank in January, arguably a very good start to the
year for them.
Elsewhere, the share of government bonds within the pool of EU-originated fixed-income collateral reported in a recent European Repo and Collateral Council (ERCC) survey saw it fallback, citing rapid growth in non-government securities issued in Denmark and Sweden as one of the main reasons.
In the technology sphere, the Copenhagen-based SimCorp introduced new modules and enhancements to its investment management tool, know as SimCorp Dimension.
The new feature, enables portfolio managers to block positions from the collateral pledging process.
However, Euroclear Finland announced that it had postponed its Infinity Release 2, which would have prepared it for access to TARGET2-网爆吃瓜 (T2S).
The securities lending market, in terms of Nordics demand, as in many other world markets, comes from local bank鈥檚 brokers, investment companies and asset managers, as well as the international market dominated by the larger investment banks, custodians and prime brokers.
In terms of securities lending, on the world鈥檚 stage, Sweden stands in front of the other Nordic countries. When it comes to lending volume, Finnish investors have a more active engagement in markets such as Russia, Turkey and Poland, while it鈥檚 Asia presence also became more active last year.
But where equities lending is concerned, Danish equities were, according to SEB Markets, worth around $50 billion in lending programmes last year, with utilisation in the equity market showing a healthy supply. This was because through 2016 and 2017, the Danish economy grew by around 1.3 percent.
Fiona Mitchell, head of Nordic relationship management at Northern Trust, says there has been some volatility.
She says: 鈥淚ncreased equity market volatility has certainly played into the hands of some parts of the hedge fund sector. Quantitative strategy hedge funds, which deploy algorithmic based trading models, are characteristically more active in periods of increased equity volatility and this has in-turn helped support slightly higher loan volumes across both the Nordics, and beyond, in 2018.鈥�
鈥淲hile a number of the historical drivers of demand across the region are changing, from a macro-economic standpoint we still see robust short interest in the region. Long-term directional interest across both the financial services and biotechnology sector continue to support good revenue returns.鈥�
Historically the smallest of the local equities markets, Denmark has grown in size, particularly on the back of its pharmaceutical industry, to become home to the largest company by market capitalisation in the Nordics, Novo Nordisk, which in 2017, made up about 29.4 percent of the KFX 20.
Elsewhere, it wouldn鈥檛 be audacious to say that liquidity has improved in the Nordics, especially in Finland, thanks largely to the introduction of fund companies and institutional investment companies in to the market in the last two to three years.
Regulation SOS
Many Nordic clients regard the lending of core European bonds as part of good corporate citizenship as it provides liquidity to the market, even amidst regulatory sensitive periods concerning SFTR and the second Markets in Financial Instruments Directive (MiFID II).
Although where MiFID II is concerned there is a transaction reporting element, 鈥渢hough securities lending transactions are not in scope as they will be captured by SFTR鈥�, according to Mitchell.
Andy Dyson, CEO of the International 网爆吃瓜 Lending Association (ISLA) recently released a video message on to the association鈥檚 website stating 鈥淪FTR is at a very pivotal point鈥�.
He adds: 鈥淲e are currently waiting for the [European] Commission to start the formal adoption of the technical standards that were published by the European 网爆吃瓜 and Markets Authority (ESMA) in March 2017鈥�. European entities in Stockholm and Copenhagen in particular will be waiting for these technical standards too.
On and on and on
Beneficial owners holding core European bonds and high-quality liquid assets continued to experience healthy returns in 2017. But is this set to continue in 2018?
Last year, Christopher Kandimaa from Danske Bank, suggested that overall the positive trends will continue into 2018.
Moving further into 2018, and the revolution of technology and blockchain cannot be denied. One of the world鈥檚 largest Nordic banks, SEB, joined forces with Nasdaq to test and further develop a prototype mutual fund trading platform based on blockchain technology, and that鈥檚 just one example.
According to a panelist at this year鈥檚 2018 Association of the Luxembourg Fund Industry鈥檚 (ALFI) European Asset Management Conference in Luxembourg, the European financial services industry is still in the 鈥渇oothills of trade technology鈥�, with big changes coming in a few years time, but what will that industry look like when Brexit is implemented?
Brexit: When all is said and done
The UK is expected to leave the EU in March 2019, notwithstanding, any transitional agreements.
The decision of the UK to leave not only the EU but, as stated by the UK Government, also the single market, has led to a situation in which there is the potential for a significant shift of entities and activities from the UK to the EU27, according to the ESMA chair Steven Maijoor.
An ESMA representative at this year鈥檚 European Asset Management Conference in Luxembourg also stated that they are 鈥減repared for the UK to become a third party鈥�.
Although Norway is not a member state of the EU, it is closely associated with the union through its membership in the European Economic Area (EEA). Could this be the UKs future, or could London鈥檚 status as a financial hub, be partly given over to Stockholm, or Copenhagen?
At Sibos 2017, an audience poll predicted that Frankfurt could be set to displace London as a global financial centre after Brexit. But what are Stockholm鈥檚 chances?
In late 2017, NEX Regulatory Reporting received approval from ESMA to become a trade repository under the European Market Infrastructure Regulation (EMIR), but the trade repository will be based in Stockholm, preparing NEX for its trade operations post-Brexit. Will we see any other firms move all or a portion of their services to the Scandinavian financial capital?
Bo Thulin, head of the Nordics for Northern Trust, says: 鈥淭he extent to which entities are choosing to domicile part of all their business in the Nordics is unclear; but we could begin to see broader shifts in terms of mutual fund locations, talent relocation and differing member states becoming more able to influence the content of financial regulation, all of which are potential disruptors.鈥�
However, Christopher Kandimaa, head of equity finance at Danske Bank, argues it may be too early to tell.
He explains: 鈥淚t鈥檚 not likely to be seen until after 2019 or when the final deal is presented, but impact is expected to be limited at this point in time.鈥�
Nordics Statistics (Samuel Pierson, IHS Markit)
Last year saw a curve in the road for securities lending in the Nordics region. Certain areas, such as equity lending, and regulations including 网爆吃瓜 Financing Transactions Regulation (SFTR), proved a challenge, however, Lago鈥檚 Kapital, for one, saw some improvement in overall liquidity.
Meanwhile, Saxo Bank reported a net profit of DKK 401 million (鈧�53.8 million) for 2017, an increase of 33 per cent compared to 2016. Client collateral deposits increased to DKK 103.6 billion (鈧�13.9 billion), while the operating income for the group was DKK 3 billion (鈧�402.8 million), a 3 percent increase compared to 2016.
The results come after Saxo Bank announced the sale of its subsidiary Saxo Privatbank to Danish financial services group, Alm. Brand Bank in January, arguably a very good start to the
year for them.
Elsewhere, the share of government bonds within the pool of EU-originated fixed-income collateral reported in a recent European Repo and Collateral Council (ERCC) survey saw it fallback, citing rapid growth in non-government securities issued in Denmark and Sweden as one of the main reasons.
In the technology sphere, the Copenhagen-based SimCorp introduced new modules and enhancements to its investment management tool, know as SimCorp Dimension.
The new feature, enables portfolio managers to block positions from the collateral pledging process.
However, Euroclear Finland announced that it had postponed its Infinity Release 2, which would have prepared it for access to TARGET2-网爆吃瓜 (T2S).
The securities lending market, in terms of Nordics demand, as in many other world markets, comes from local bank鈥檚 brokers, investment companies and asset managers, as well as the international market dominated by the larger investment banks, custodians and prime brokers.
In terms of securities lending, on the world鈥檚 stage, Sweden stands in front of the other Nordic countries. When it comes to lending volume, Finnish investors have a more active engagement in markets such as Russia, Turkey and Poland, while it鈥檚 Asia presence also became more active last year.
But where equities lending is concerned, Danish equities were, according to SEB Markets, worth around $50 billion in lending programmes last year, with utilisation in the equity market showing a healthy supply. This was because through 2016 and 2017, the Danish economy grew by around 1.3 percent.
Fiona Mitchell, head of Nordic relationship management at Northern Trust, says there has been some volatility.
She says: 鈥淚ncreased equity market volatility has certainly played into the hands of some parts of the hedge fund sector. Quantitative strategy hedge funds, which deploy algorithmic based trading models, are characteristically more active in periods of increased equity volatility and this has in-turn helped support slightly higher loan volumes across both the Nordics, and beyond, in 2018.鈥�
鈥淲hile a number of the historical drivers of demand across the region are changing, from a macro-economic standpoint we still see robust short interest in the region. Long-term directional interest across both the financial services and biotechnology sector continue to support good revenue returns.鈥�
Historically the smallest of the local equities markets, Denmark has grown in size, particularly on the back of its pharmaceutical industry, to become home to the largest company by market capitalisation in the Nordics, Novo Nordisk, which in 2017, made up about 29.4 percent of the KFX 20.
Elsewhere, it wouldn鈥檛 be audacious to say that liquidity has improved in the Nordics, especially in Finland, thanks largely to the introduction of fund companies and institutional investment companies in to the market in the last two to three years.
Regulation SOS
Many Nordic clients regard the lending of core European bonds as part of good corporate citizenship as it provides liquidity to the market, even amidst regulatory sensitive periods concerning SFTR and the second Markets in Financial Instruments Directive (MiFID II).
Although where MiFID II is concerned there is a transaction reporting element, 鈥渢hough securities lending transactions are not in scope as they will be captured by SFTR鈥�, according to Mitchell.
Andy Dyson, CEO of the International 网爆吃瓜 Lending Association (ISLA) recently released a video message on to the association鈥檚 website stating 鈥淪FTR is at a very pivotal point鈥�.
He adds: 鈥淲e are currently waiting for the [European] Commission to start the formal adoption of the technical standards that were published by the European 网爆吃瓜 and Markets Authority (ESMA) in March 2017鈥�. European entities in Stockholm and Copenhagen in particular will be waiting for these technical standards too.
On and on and on
Beneficial owners holding core European bonds and high-quality liquid assets continued to experience healthy returns in 2017. But is this set to continue in 2018?
Last year, Christopher Kandimaa from Danske Bank, suggested that overall the positive trends will continue into 2018.
Moving further into 2018, and the revolution of technology and blockchain cannot be denied. One of the world鈥檚 largest Nordic banks, SEB, joined forces with Nasdaq to test and further develop a prototype mutual fund trading platform based on blockchain technology, and that鈥檚 just one example.
According to a panelist at this year鈥檚 2018 Association of the Luxembourg Fund Industry鈥檚 (ALFI) European Asset Management Conference in Luxembourg, the European financial services industry is still in the 鈥渇oothills of trade technology鈥�, with big changes coming in a few years time, but what will that industry look like when Brexit is implemented?
Brexit: When all is said and done
The UK is expected to leave the EU in March 2019, notwithstanding, any transitional agreements.
The decision of the UK to leave not only the EU but, as stated by the UK Government, also the single market, has led to a situation in which there is the potential for a significant shift of entities and activities from the UK to the EU27, according to the ESMA chair Steven Maijoor.
An ESMA representative at this year鈥檚 European Asset Management Conference in Luxembourg also stated that they are 鈥減repared for the UK to become a third party鈥�.
Although Norway is not a member state of the EU, it is closely associated with the union through its membership in the European Economic Area (EEA). Could this be the UKs future, or could London鈥檚 status as a financial hub, be partly given over to Stockholm, or Copenhagen?
At Sibos 2017, an audience poll predicted that Frankfurt could be set to displace London as a global financial centre after Brexit. But what are Stockholm鈥檚 chances?
In late 2017, NEX Regulatory Reporting received approval from ESMA to become a trade repository under the European Market Infrastructure Regulation (EMIR), but the trade repository will be based in Stockholm, preparing NEX for its trade operations post-Brexit. Will we see any other firms move all or a portion of their services to the Scandinavian financial capital?
Bo Thulin, head of the Nordics for Northern Trust, says: 鈥淭he extent to which entities are choosing to domicile part of all their business in the Nordics is unclear; but we could begin to see broader shifts in terms of mutual fund locations, talent relocation and differing member states becoming more able to influence the content of financial regulation, all of which are potential disruptors.鈥�
However, Christopher Kandimaa, head of equity finance at Danske Bank, argues it may be too early to tell.
He explains: 鈥淚t鈥檚 not likely to be seen until after 2019 or when the final deal is presented, but impact is expected to be limited at this point in time.鈥�
Nordics Statistics (Samuel Pierson, IHS Markit)
- Nordic equity delivered Q1 2018 revenue of $60 million, up 12 percent as compared with Q1 2017
- Lendable balances continued uptrend, increasing 37 percent in Q1 2018 vs Q1 2017
- On loan balances increase to $23 billion, a 32 percent as compared with Q1 2017
- Swedish equities led demand increase, with balances up $3.3 billion
- Lendable growth outpaced borrow demand leading to a 9 percent decline in utilisation
- Key revenue driving stocks include Stockmann Oyg, Frontline, H&M, and Pandora
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