Brown Brothers
Keith Haberlin
17 September 2013
Brown Brothers Harriman’s Keith Haberlin tells SLT how 2013 is shaping up for securities lending, and what the current regulatory environment looks like
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How is 2013 shaping up in terms of securities lending revenues and what impact will changes to monetary policy have on demand?/
Two thousand and thirteen will have been a challenging year for many investors as tax harmonisation starts to bite into revenues; the number of specials has been limited; and the reinvestment environment has offered limited opportunity.
However, we are firmly of the belief that these are cyclical factors. Uncertainty over monetary policy, in particular, has been hampering conviction in the hedge fund and M&A strategies, that drive borrowing demand. But as monetary policy becomes clearer, we should see less distortion in both interest rates and equity valuations and this will bring back the type of confidence, volatility and risk in the market that drive borrowing demand.
We have seen some recent clarity in the regulatory environment. Which rules and proposals deserve focus right now and what will they mean for agent lenders?
It’s very difficult to single out any specific rule as there are so many that have some form of impact on securities lending. So, it’s really the cumulative impact of all of the regulations that we have to consider.
While it is too early to predict their full extent, Basel III, US Dodd-Frank Act Section 165(e), the Financial Stability Board’s shadow banking rules, and the EU Financial Transaction Tax, will in all probability have an impact on the profitability of the securities lending business for agent lenders and borrowers by virtue of higher utlisation of both capital and credit lines and potentially a greater tax burden too.
In light of this, we expect entities across the supply chain to place even greater focus on prioritising resources towards higher-margin activity and clients. In such an environment, we believe intrinsic value lending will remain resilient at the expense of lower margin general collateral lending and there will likely be changes to how indemnification is currently offered given the increased amount of capital it will attract.
How would you respond to concerns over whether securities lending is worth doing given the twin challenges of regulatory burdens and muted demand?
Front and centre of any strategic evaluation of lending must be the cyclical nature of the current demand and regulatory environment. It would therefore be a mistake, in my opinion, to make decisions right now about a product that should be viewed as a long-term investment overlay. If done correctly, securities lending is an activity that adds basis point returns to funds year after year, and with limited risk and effort. In addition to the positive impact that a more normalised interest rate and investing environment should have on demand, it’s also important to note the secular growth that is continuing to occur in hedge fund assets under management. The fact that hedge funds and alternatives are becoming more mainstream bodes well for borrowing demand over the long term.
How do you think BBH is positioned once the dust has settled on key regulations?
I feel more confident than ever about BBH’s position in the industry for a couple of key reasons. Firstly, I believe the shift to intrinsic value lending is likely here to stay because the profitability of general collateral lending stands to be most negatively affected by the cumulative impact of tax and regulatory change. So as an intrinsic value lending specialist since inception, we’re well positioned to help clients execute upon that strategy.
Secondly, I think the impact of regulations will cause a certain amount of disruption to traditional securities lending arrangements. Clients will continue to push for greater levels of transparency, customisation and service, so I think there’s opportunity for providers like us who are nimble of enough to meet these and are strategically committed to agency lending and prepared to continue investing in it. It’s an exciting time to be part of the securities lending business at BBH.
On a more personal note, you moved back to the US earlier this year. How are you enjoying it?
I’m thoroughly enjoying it. It’s helped that my family and I lived here before, so we knew what to expect and have settled in well. Of course, I miss aspects of living in the UK. But fortunately the job allows me the opportunity to return often so I can catch up with friends, family and have a decent curry! From a professional perspective, I now have the benefit of being in the head office but with a global remit, which helps to ensure we have an eye on the differing needs of our global client base
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