Keep on moving
27 January 2015
Asset managers are among the most adaptable beneficial owners in the EMEA, but they must remain conscious of continuing regulatory upheaval, says State Street’s Maurice Leo
Image: Shutterstock
How would you describe 2014 for securities lending in the EMEA, for both State Street and the wider industry?
It was a year of continued adaptation for the industry in Europe, the Middle East and Africa (EMEA). Headline implementations included the adoption of the European Íø±¬³Ô¹Ï and Markets Authority (ESMA) guidelines on exchange-traded funds (ETFs) and UCITS in February, and the wider securities services industry transition to a T+2 settlement regime in Europe in early October, which is a pre-cursor to the future adoption of the Central Íø±¬³Ô¹Ï Depository Regulations defined by ESMA.
In a global context, we continued to refine our interpretation of the programme impacts of Basel III and the US Dodd-Frank Act within the context of our broader regulatory due diligence. The influence of certain regulations on the industry is already evident. This offers a practical context for engaging our clients today in discussions about how they might realign their programme guidelines to optimise their returns. I would emphasise that this will not be a static agenda or dialogue.
In line with the aggregate industry trends in recent years, we continued to witness strong supply fundamentals in 2014. Historical sources of inventory, including our official institution, asset owner and insurance client base, continued to grow organically, and we also saw continued, substantive growth among asset manager clients.
Borrower demand continued to be defined in large part by balance sheet capacity in 2014. Individual borrower idiosyncrasies are very evident, with different borrowers showing more pronounced interest in particular markets, or even stocks, and collateral types.
What are some of the emerging trading trends in the EMEA region, and what you would attribute their rise to?
Term and corporate action-based trade opportunities continued to increase in 2014. A number of clients have developed formalised governance structures to support prompt due diligence and decisions on specific trade ideas that we present for consideration.
Borrowers continue to gravitate towards formalised term-lending transactions. Those institutional investors with an appropriately stable liquidity profile can secure a premium versus open, or overnight, loans. We expect the scale of formalised term lending to increase as borrowers further adapt to emerging regulatory standards. These opportunities span all asset classes—fixed income and equities. Demand for Europe-domiciled ETF supply that is available for term has been particularly notable in the past year.
We also have witnessed a deepening in the volume of SCRIP-based trades, optimised by advance client elections, as the popularity of SCRIP distributions continues to widen, especially for European issuers.
What is the situation with beneficial owners’ collateral profiles in the EMEA? Are they more or less conservative about what they will accept as collateral from borrowers, and why?
The ESMA guidelines on ETFs and UCITS created a significant divergence between the eligible regulatory collateral profiles for those funds in Europe relative to other asset owners or official institutions. In particular, the collateral diversification thresholds defined by ESMA have had an influence on borrower demand towards ETFs’ and UCITS funds’ supply with respect to general collateral trades, for which collateral flexibility is a determining feature in the appeal of any supply.
With increased lending activity versus non-cash collateral, we have continued to work with clients to extend permissible collateral within the confines of their proprietary risk policies. Our enterprise risk management and product risk specialists are very engaged in these discussions with their peers at the client institutions, reflecting the broader stakeholder governance structures that now characterise portfolio participation in lending programmes. One noteworthy emerging collateral grouping is equity-based ETFs, reflecting the global growth in issuance and liquidity in this product area.
Given the unprecedented regulatory and monetary authority intervention in the market at present, guideline flexibility with regards to counterparty distribution and eligible collateral remains key to optimising risk-adjusted returns from securities lending. That flexibility positions agents to align supply with increasingly individualistic borrower demand profiles to sustain client performance.
Where do you see asset managers as a source of lendable securities in the EMEA? Is their importance to the business increasing or decreasing, and why?
I think asset managers will remain an important strategic community within the securities lending arena given their adaptability and the favourable outlook for the sector in EMEA. Asset managers are among the strongest and most visible advocates of securities lending. The participation rate of European-domiciled ETFs in securities lending reflects that.
Regulatory standards such as the previously mentioned ESMA guidelines on ETFs and UCITS will influence the appeal to borrowers of certain lendables enrolled by asset managers. As a consequence, we anticipate a continued migration towards specials rather than to general collateral lending for progammes subject to such regulation. This contrasts with the asset owner, official institution and insurance sectors that participate in securities lending under different regulatory profiles.
What are the key regulations affecting asset managers when it comes to securities lending in the EMEA region?
There is a diverse range of direct and indirect regulatory influences to consider.
The ESMA guidelines on ETFs and UCITS are the most noteworthy, direct regulation in terms of managing exposure and promoting additional disclosures and transparency around risk and performance, and so on.
Basel III and the Dodd-Frank Act will also cause downstream impacts—for asset managers and others—enrolled in securities lending. Both affect borrower (or their end client) and intermediary (such as agent lenders) behaviour. Balance sheet deleveraging and the resultant contraction in loan volumes, or shortening in loan durations, are practical examples of such indirect regulatory impacts in recent years. The momentum towards term lending, for those that can engage, will be strengthened by the eventual adoption of the Basel framework’s net stable fund ratio.
The Basel framework for measuring and controlling large exposures is likely to promote the expansion of the counterparty universe to include institutions with more regional or local demand profiles. The latter will supplement business historically transacted with larger global entities that are increasingly constrained due to their systemic importance.
Of course, the EU Financial Transaction Tax has an overarching command on the attention of all asset managers—as well as other institutional investors—given the expanse of its potential application.
It was a year of continued adaptation for the industry in Europe, the Middle East and Africa (EMEA). Headline implementations included the adoption of the European Íø±¬³Ô¹Ï and Markets Authority (ESMA) guidelines on exchange-traded funds (ETFs) and UCITS in February, and the wider securities services industry transition to a T+2 settlement regime in Europe in early October, which is a pre-cursor to the future adoption of the Central Íø±¬³Ô¹Ï Depository Regulations defined by ESMA.
In a global context, we continued to refine our interpretation of the programme impacts of Basel III and the US Dodd-Frank Act within the context of our broader regulatory due diligence. The influence of certain regulations on the industry is already evident. This offers a practical context for engaging our clients today in discussions about how they might realign their programme guidelines to optimise their returns. I would emphasise that this will not be a static agenda or dialogue.
In line with the aggregate industry trends in recent years, we continued to witness strong supply fundamentals in 2014. Historical sources of inventory, including our official institution, asset owner and insurance client base, continued to grow organically, and we also saw continued, substantive growth among asset manager clients.
Borrower demand continued to be defined in large part by balance sheet capacity in 2014. Individual borrower idiosyncrasies are very evident, with different borrowers showing more pronounced interest in particular markets, or even stocks, and collateral types.
What are some of the emerging trading trends in the EMEA region, and what you would attribute their rise to?
Term and corporate action-based trade opportunities continued to increase in 2014. A number of clients have developed formalised governance structures to support prompt due diligence and decisions on specific trade ideas that we present for consideration.
Borrowers continue to gravitate towards formalised term-lending transactions. Those institutional investors with an appropriately stable liquidity profile can secure a premium versus open, or overnight, loans. We expect the scale of formalised term lending to increase as borrowers further adapt to emerging regulatory standards. These opportunities span all asset classes—fixed income and equities. Demand for Europe-domiciled ETF supply that is available for term has been particularly notable in the past year.
We also have witnessed a deepening in the volume of SCRIP-based trades, optimised by advance client elections, as the popularity of SCRIP distributions continues to widen, especially for European issuers.
What is the situation with beneficial owners’ collateral profiles in the EMEA? Are they more or less conservative about what they will accept as collateral from borrowers, and why?
The ESMA guidelines on ETFs and UCITS created a significant divergence between the eligible regulatory collateral profiles for those funds in Europe relative to other asset owners or official institutions. In particular, the collateral diversification thresholds defined by ESMA have had an influence on borrower demand towards ETFs’ and UCITS funds’ supply with respect to general collateral trades, for which collateral flexibility is a determining feature in the appeal of any supply.
With increased lending activity versus non-cash collateral, we have continued to work with clients to extend permissible collateral within the confines of their proprietary risk policies. Our enterprise risk management and product risk specialists are very engaged in these discussions with their peers at the client institutions, reflecting the broader stakeholder governance structures that now characterise portfolio participation in lending programmes. One noteworthy emerging collateral grouping is equity-based ETFs, reflecting the global growth in issuance and liquidity in this product area.
Given the unprecedented regulatory and monetary authority intervention in the market at present, guideline flexibility with regards to counterparty distribution and eligible collateral remains key to optimising risk-adjusted returns from securities lending. That flexibility positions agents to align supply with increasingly individualistic borrower demand profiles to sustain client performance.
Where do you see asset managers as a source of lendable securities in the EMEA? Is their importance to the business increasing or decreasing, and why?
I think asset managers will remain an important strategic community within the securities lending arena given their adaptability and the favourable outlook for the sector in EMEA. Asset managers are among the strongest and most visible advocates of securities lending. The participation rate of European-domiciled ETFs in securities lending reflects that.
Regulatory standards such as the previously mentioned ESMA guidelines on ETFs and UCITS will influence the appeal to borrowers of certain lendables enrolled by asset managers. As a consequence, we anticipate a continued migration towards specials rather than to general collateral lending for progammes subject to such regulation. This contrasts with the asset owner, official institution and insurance sectors that participate in securities lending under different regulatory profiles.
What are the key regulations affecting asset managers when it comes to securities lending in the EMEA region?
There is a diverse range of direct and indirect regulatory influences to consider.
The ESMA guidelines on ETFs and UCITS are the most noteworthy, direct regulation in terms of managing exposure and promoting additional disclosures and transparency around risk and performance, and so on.
Basel III and the Dodd-Frank Act will also cause downstream impacts—for asset managers and others—enrolled in securities lending. Both affect borrower (or their end client) and intermediary (such as agent lenders) behaviour. Balance sheet deleveraging and the resultant contraction in loan volumes, or shortening in loan durations, are practical examples of such indirect regulatory impacts in recent years. The momentum towards term lending, for those that can engage, will be strengthened by the eventual adoption of the Basel framework’s net stable fund ratio.
The Basel framework for measuring and controlling large exposures is likely to promote the expansion of the counterparty universe to include institutions with more regional or local demand profiles. The latter will supplement business historically transacted with larger global entities that are increasingly constrained due to their systemic importance.
Of course, the EU Financial Transaction Tax has an overarching command on the attention of all asset managers—as well as other institutional investors—given the expanse of its potential application.
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