Universities Superannuation Scheme
Leandros Kalisperas
22 January 2013
The UK pension scheme for higher education institutions is no stranger to securities lending. SLT talks to Leandros Kalisperas, who oversees its programme, about the importance of greasing the wheels of an investment machine
Image: Shutterstock
How does USS view securities lending?
It’s in the context of my role at Universities Superannuation Scheme (USS) looking after the credit portfolio that I was asked to oversee our securities lending platform and policy. It’s not a full-time job for anyone here and I guess that speaks to the relative importance of it, as we don’t run any sort of optimised treasury model at this stage. Íø±¬³Ô¹Ï lending is a by-product of the investment allocation to the extent that we are long-term holders of securities, and therefore we do that activity within guidelines. We don’t currently do fixed, long-term securities lending, such as collateral upgrades or six- or 12-month trades, or anything like that.
When USS first started lending securities, the emphasis was on recouping custodian costs with our agent lender J.P. Morgan, which is also our custodian. We do cover our costs on that, which is good, and then we do make some extra money.
We’re long-term holders of equities, for example, so we’re happy for other people to borrow our shares and short them if they so wish. We can generate a fee from that. We’re also long-term holders of index-linked bonds, so if people need bonds for liquidity purposes or other reasons, then again we’re happy to lend those out over short periods and so on.
It is important to say that from a profit perspective, when you look at the scheme overall, securities lending only returns a small handful of basis points. So it really is noise at the overall scheme level. But from an operational perspective, meaning costs and budget, it’s a useful line item for covering those things—it’s just not a return-optimising operation from an investment standpoint.
How strict are your guidelines around securities lending?
Our guidelines dictate that we only operate an open securities lending programme, so we have to be able to recall securities at any time. It’s a safeguarding scheme for custody-held assets and about not letting them out of our hands for any fixed terms. We need to be able to recall securities whenever we want.
We also, as others do, make sure that if we receive collateral (rather than cash) as security, then it’s up to our agent lender to make sure that the haircuts and so on that it demands of the borrower are sufficient. If there is a shortfall, then it is for the agent lender to deal with that.
How important is your agent lender to your business?
From our perspective, we couldn’t run the complex range of activity that is involved in securities lending without our agent lender. We would have to have an in-house team if we were going to bypass an agent lender and talk to the market directly. This is not something that we have or envision having at this stage, so J.P. Morgan is very important to us in doing the business.
Why is securities lending a bundled service?
At this stage, we have taken the view that this is an incremental return to our business rather than something that is a real driver of anything. We also have a number of moving parts in terms of the derivative and collateral pieces in our investment programme, and J.P. Morgan as our custodian assists on a number of things in a number of those areas. If securities lending were to be stripped out, then that would become an operational burden because it would have to be outsourced to a different provider that would have to plug into J.P. Morgan. We periodically review this but this is our current view.
What else does your agent lender do for you?
We have periodic performance reporting and reviews of the portfolio. We do set some broad targets for the year with J.P. Morgan running a model for the portfolio, but we discount a lot of that because it’s uncertain. There are very few aspects of securities lending that we can treat as guaranteed income.
How difficult to predict is the business?
The market seems to change month by month. As a pension fund, we hold long-dated bonds, for example, and it seems like that at some point last year, people were more interested in the shorter-dated stuff, so we weren’t lending out as many of our bonds. But then there was a lot of demand for some of our emerging market / Asian equities. We had lots of stock out on loan there. We don’t try to think too hard about that. We try to negotiate a decent fee split for ourselves vis-à -vis the agent lender and monitor the programme through the year to see how it’s doing.
What is on the horizon that you need to be aware of?
Something that people are talking about is the move towards central clearing and the need for high quality collateral. The demand for certain securities may increase in certain pockets, but our own requirement for that collateral to be used elsewhere may also increase.
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