Leading the way
15 May 2018
Maintaining its strong position in the market, Canada remains an investment destination of choice. Rob Ferguson and Lisa Tomada of CIBC Mellon explain why
Image: Shutterstock
What are some trends you’re seeing in the Canadian market?
Rob Ferguson: Canada is one of the largest securities lending markets in the world after the US. The stability and transparency of Canada’s banking and regulatory environment, along with its AAA-rating, attractive risk profile and status as a robust and mature market, has helped Canada’s securities lending market maintain its position among institutional investors. With the sustained low interest rate environment, beneficial owners look to securities lending as a means to enhance returns, and to offset the impact of the low interest rate environment we have been experiencing over the last two years.
Lisa Tomada: There are a few key trends that continue in the Canadian market. Market demand for Canadian high-quality liquid assets (HQLAs) continues as Canada is a major issuer of federal government and provincial debt. In addition to HQLAs, another key trend in Canada is collateral flexibility. Collateral acceptability can make or break trades in the Canadian market. Beneficial owners will find that more flexibility can offer a greater chance of capturing additional returns. As borrower demands fluctuate, participants with flexible collateral schedules can take advantage of the changes immediately. Finally, collateral transformation trades are used by borrowers for a variety of purposes and support increased revenue for beneficial owners. In this transaction, a borrower may trade in a less liquid or lower quality form of collateral, such as equities in exchange for borrowing HQLAs.
How has regulatory change shaped the business?
Tomada: Regulatory changes have borrowers keeping a closer eye on various capital calculations. The liquidity coverage ratio and net stable funding ratio require borrowers to show they have their liabilities covered with sufficient funding over a specified period of time. These new requirements are driving the interest we have seen toward highly rated assets.
With Canada being one of the few remaining AAA-rated countries, we have experienced strong demand for Canadian government-issued debt, such as bonds, resulting in record balances in loans of Canadian fixed income.
Ferguson: We are seeing increased demand from clients for term trades (as compared to open trades) and we notice there are more term trades in the Canadian market than in previous years. A reason for this trend could be the need to receive capital relief, driven by regulatory change.
Is it still considered a general collateral market in Canada?
Ferguson: In the past, Canada has been primarily a general collateral (GC) type market. However, over the last three years, beginning with the resource sector correction, we noticed that the Canadian equity market has generated significant revenue from specials over general collateral. We have since seen strong demand for Canadian equity securities continue as interest shifts to other sectors.
The following chart demonstrates the start of diverging directions of Canadian equity volume-weighted average fees (VWAF) versus the Commodity Research Bureau index during 2015 and 2016.
What changes are on the horizon in Canada?
Ferguson: The Canadian Íø±¬³Ô¹Ï Administrators (CSA) is working to modernise investment fund product regulation, with the goal of developing a more comprehensive regulatory framework for publicly offered mutual funds.
The proposed amendments would allow mutual funds to invest in asset classes, or use investment strategies, that are not currently permitted to be used by conventional mutual funds under National Instrument (NI) 81-102, the key regulatory framework for mutual funds in Canada. This anticipated policy change would introduce liquid alternatives as an option for mutual funds for retail non-accredited investors, and it has the potential to open up another avenue of demand for securities finance.
In addition, CASLA is working on driving change to equity collateral. The association is actively lobbying for changes to NI 81-102 to expand collateral flexibility with respect to including equities as an acceptable form of collateral for Canadian investment funds. This change would align Canadian mutual funds with their peers, such as UCITS and Canadian pooled funds and pension plans.
How is technology impacting securities lending?
Tomada: Technology continues to play an important role in how securities lending programmes operate. Participants are looking for more automation of GC transactions and greater investment in obtaining data to support special fee loans. Technology also helps make the process of settling trades and exchanging collateral more efficient.
Source:
Volume weighted average Fee data sourced from IHS Market Íø±¬³Ô¹Ï
Finance and Commodity Research Bureau sourced from Bloomberg
Rob Ferguson: Canada is one of the largest securities lending markets in the world after the US. The stability and transparency of Canada’s banking and regulatory environment, along with its AAA-rating, attractive risk profile and status as a robust and mature market, has helped Canada’s securities lending market maintain its position among institutional investors. With the sustained low interest rate environment, beneficial owners look to securities lending as a means to enhance returns, and to offset the impact of the low interest rate environment we have been experiencing over the last two years.
Lisa Tomada: There are a few key trends that continue in the Canadian market. Market demand for Canadian high-quality liquid assets (HQLAs) continues as Canada is a major issuer of federal government and provincial debt. In addition to HQLAs, another key trend in Canada is collateral flexibility. Collateral acceptability can make or break trades in the Canadian market. Beneficial owners will find that more flexibility can offer a greater chance of capturing additional returns. As borrower demands fluctuate, participants with flexible collateral schedules can take advantage of the changes immediately. Finally, collateral transformation trades are used by borrowers for a variety of purposes and support increased revenue for beneficial owners. In this transaction, a borrower may trade in a less liquid or lower quality form of collateral, such as equities in exchange for borrowing HQLAs.
How has regulatory change shaped the business?
Tomada: Regulatory changes have borrowers keeping a closer eye on various capital calculations. The liquidity coverage ratio and net stable funding ratio require borrowers to show they have their liabilities covered with sufficient funding over a specified period of time. These new requirements are driving the interest we have seen toward highly rated assets.
With Canada being one of the few remaining AAA-rated countries, we have experienced strong demand for Canadian government-issued debt, such as bonds, resulting in record balances in loans of Canadian fixed income.
Ferguson: We are seeing increased demand from clients for term trades (as compared to open trades) and we notice there are more term trades in the Canadian market than in previous years. A reason for this trend could be the need to receive capital relief, driven by regulatory change.
Is it still considered a general collateral market in Canada?
Ferguson: In the past, Canada has been primarily a general collateral (GC) type market. However, over the last three years, beginning with the resource sector correction, we noticed that the Canadian equity market has generated significant revenue from specials over general collateral. We have since seen strong demand for Canadian equity securities continue as interest shifts to other sectors.
The following chart demonstrates the start of diverging directions of Canadian equity volume-weighted average fees (VWAF) versus the Commodity Research Bureau index during 2015 and 2016.
What changes are on the horizon in Canada?
Ferguson: The Canadian Íø±¬³Ô¹Ï Administrators (CSA) is working to modernise investment fund product regulation, with the goal of developing a more comprehensive regulatory framework for publicly offered mutual funds.
The proposed amendments would allow mutual funds to invest in asset classes, or use investment strategies, that are not currently permitted to be used by conventional mutual funds under National Instrument (NI) 81-102, the key regulatory framework for mutual funds in Canada. This anticipated policy change would introduce liquid alternatives as an option for mutual funds for retail non-accredited investors, and it has the potential to open up another avenue of demand for securities finance.
In addition, CASLA is working on driving change to equity collateral. The association is actively lobbying for changes to NI 81-102 to expand collateral flexibility with respect to including equities as an acceptable form of collateral for Canadian investment funds. This change would align Canadian mutual funds with their peers, such as UCITS and Canadian pooled funds and pension plans.
How is technology impacting securities lending?
Tomada: Technology continues to play an important role in how securities lending programmes operate. Participants are looking for more automation of GC transactions and greater investment in obtaining data to support special fee loans. Technology also helps make the process of settling trades and exchanging collateral more efficient.
Source:
Volume weighted average Fee data sourced from IHS Market Íø±¬³Ô¹Ï
Finance and Commodity Research Bureau sourced from Bloomberg
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