J.P. Morgan
Andrew Bates and Tony Georgievski
09 April 2019
J.P. Morgan’s Andrew Bates and Tony Georgievski discuss attitudes towards securities lending in Australia, market trends and what to expect for the rest of this year and beyond
Image: Shutterstock
What is the attitude to securities lending in Australia?
We have seen somewhat of a resurgence from Australian asset owners to engage or re-engage, in securities lending in Australia. In light of recent macroeconomic and microeconomic influences, both asset owners and managers are now seeking increasing alpha for their funds via a securities lending programme. The realisation of the potential revenue achievable from a securities lending programme has seen more focus on the product, away from the yesteryear of a set-and-forget programme. Beneficial owners in Australia typically now have a greater understanding of the product and the potential returns, with minimal risk, that can be generated from an agency lending programme.
What do you see in terms of client requirements in Australia?
Similar to clients in other locations, Australian clients want to understand the drivers of the programme and the impact that their risk profile has on returns. They want to see what securities are in demand, where the returns are coming from and also how they rank among their peers. Transparency of both the market and their programme is paramount, and the ability to have access to in-depth reporting is fast becoming a necessity. They are also keen to understand the effect the various lending parameter decisions have on their returns.
Despite the domestic alignment of the Australian market, asset allocation growth has been peripheral to Australia. This has placed more importance on a provider’s ability to service the client on both a domestic and international scale. Our global presence and footprint have helped us forge strong partnerships, which are key requirements for many beneficial owners.
What market trends are you seeing in Australia?
Clients that have previously shut down a lending programme have been looking to reengage, and the peer benchmarking done across both the asset owners and asset managers showcases the need to ‘keep up with the pack’. There is more information flow amongst the entire client base, which helps to promote best practice and continual improvement in the Australian marketplace.
We have seen greater allocation to emerging markets in the international assets of the portfolios, which has created interest in lending those assets in newer markets such as Brazil and South Korea.
The concepts of environmental, social and governance (ESG) and being responsible asset owners have broadening appeal to many beneficial owners. One result is that super funds are keen to demonstrate their participation in proxy voting. Compulsory proxy voting by a lender leads to borrowers often being forced to close out long-term trades to satisfy a recall. As a consequence, borrowers are targeting balance towards non-proxy voting clients or contentious vote recalls only. Understanding the impact for both sides, J.P. Morgan can have an appropriate dialogue, explaining that clients can still be responsible to shareholders while continuing to generate securities lending revenue for their portfolio. Rather than recalling a whole on-loan book, we can discuss alternatives to consider and work with our clients as their needs evolve.
On the topic of sustainable investing, we have also worked with a number of funds to meet their ESG requirements by only taking single names or industries out of their portfolios. They would prefer participating in a lending programme that concurrently optimises portfolio returns and satisfies commitments to their respective social and sustainability goals.
What do clients in Australia value about your programme?
Clients in Australia understand the benefits of a strong bank backing as indemnity for the programme and place a premium on the stability and standing of J.P. Morgan as they evaluate programme entry and expansion. Our clients value the risk culture of J.P. Morgan and the process diligence embedded within our lending programme.
The local Australian presence of our extensive lending team (across trading, relationship management and operations) enables our clients to have real-time discussions, solutions and market commentary delivered to them.
How has J.P. Morgan’s agent lending team expanded in the Asia Pacific?
As our client base in the Asia Pacific grows, we are committed to providing relevant expertise to our local client base and their counterparts. The organisational alignment of agency securities lending is designed with an intentional regional focus, but with global coordination: the Asia Pacific regional head has direct responsibility for trading, cash reinvestment, client management, product and operations. This model helps support the timely resolution of client requests for Australian lenders, in-region strategic decision making and the ability to customise products for the local market. By building out our lending product and services across Australia and other Asia Pacific markets, and investing in our technology and operations footprint, we are able to constantly adapt to support our clients’ needs.
What is the outlook for the rest of this year and beyond?
With the rising cost of cash collateral and Bank Bill Swap rates trading consistently at 50 basis points (and higher) over the official RBA rate, the cost for borrowers to pledge cash collateral, has risen substantially. We see continued growth in non-cash collateral being preferred over cash, and increased use of the domestic tri-party providers. In addition, borrowers are increasingly using synthetic structures (such as total return swaps) to minimise balance sheet usage.
The sophistication of the clients’ lending programmes and their requests has increased over the past year(s). The changing regulatory landscape (both internationally and domestically) has changed the demand drivers and lender classification and clients are looking to best manage this within their lending programme. We are able to support this evolution by facilitating directed trades, non-indemnified structures and continual revision of all collateral offerings. Term trades will continue to be an enhanced revenue opportunity as beneficial owners are accepting the premium achievable for longer duration loans. The extension of the client’s own investment horizons aligns with the borrower’s capital and liquidity requirements as they seek more refined and directed financing.
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