eSecLending addresses the market from deterrents for beneficial owners to the ever increasing engagement in ESG
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What are your expectations for 2020 and what factors could affect performance?
It is very difficult to predict how 2020 will rank from a revenue performance perspective at this point, given the recent extreme market declines and sharp increase in volatility. We will need to wait to see how markets play out over time and whether volatility remains high and sustained and whether that translates into renewed directional short interest on specific securities. The US election is also a variable that could cause volatility to increase this year and potentially lead to higher lending revenues. If new markets open in 2020, that could also be a big driver of revenue for those lenders that can capture first mover advantage.
While revenue trends are uncertain, costs for agents running securities lending businesses are growing due to new regulatory reporting requirements (i.e. SFTR) and increasing costs for indemnification and higher capital allocations. Agents need to become more automated and efficient to adapt to these changing cost factors.
Lastly, we anticipate beneficial owners will continue to shift their acceptable collateral profiles in 2020, incorporating non-cash collateral to include main index equities and global sovereign debt so they can remain competitive versus other lenders as borrowers continue to shift their collateral preferences.
Is there anything dissuading beneficial owners from engaging more with the industry? Are these easy to overcome?
The most significant deterrent some beneficial owners may be experiencing today is the lack of demand for certain asset classes. Íø±¬³Ô¹Ï lending is always a secondary investment decision that is driven by revenue opportunity. If lending returns for their specific portfolios are not enough, given time allocation and risk/return analyses, they may choose to pause their decision to lend in certain assets classes until the revenue picture improves.
Are you having discussions around ESG with your clients and is this affecting your lending strategies?
Many of our clients have been heavily engaged in ESG investment principles for some time and have integrated these factors into their lending programs. We are actively engaged with some clients about their ESG policies and how best to incorporate these principles into their programs. The new ISLA Council for Sustainable Finance (ICSF) is doing a lot to guide beneficial owners on industry best practices and I believe their new Principles for Sustainable Íø±¬³Ô¹Ï Lending will be a valuable reference tool for clients when considering how best to meet the evolving needs of their investment strategies.
Which frontier markets are of most interest to your organisation?
We are excited about multiple frontier markets that are currently in scope for securities lending and borrowing arrangements and we are actively engaged with industry associations, local market exchanges and regulators to assist in establishing laws and frameworks to support the activity. Some markets are becoming relevant due to their addition into the MSCI and FTSE Emerging Markets indices. Our current focus is on markets such as Saudi Arabia, China, Philippines and Indonesia, but there are many other markets that we are actively monitoring and working on as demand evolves.
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