How has 2014 shaped up in terms of securities lending business conducted?
Paul Wilson: The Nordic countries continue to be very positive for us, translating into strong growth. We see this coming in a number of areas including new asset owners coming to market for the first time, a rotation of asset owners business between agents, and existing asset owners looking to grow revenue streams via trade structures and collateral expansion.
Asset owners in the Nordic countries are very sophisticated in terms of the level of customisation, reporting, data integration and service they expect and are very focused on risk management and mitigation, including depth, breadth, quality and stability of indemnification.
Jarkko Järvitalo: This year was our first full year in business and it turned out much better than expected, in terms of profit and loss. We also managed to increase the number of lenders that we work with substantially. Finland, meanwhile, as a Nordic market has matured a lot in a short period of time, with new players entering the market, leading to an increase in liquidity.
Sunil Daswani: From a demand perspective, the business has changed over the course of the year. Although supply continues to grow, demand remains subdued in the current market environment. As such, having technological efficiencies in place such as our EquiLend and BondLend capabilities remain essential components in servicing borrower demand and managing a complex book. Reducing leverage and increasing transparency has continued to allow us to operate a robust business to support our clients and organisation globally.
Global markets have improved across the board where clients have global assets. Asian markets remain buoyant and emerging markets demand remains solid in Asia for Taiwan and many other frontier markets such as India, Indonesia and China. In Latin America, Brazil also remains a very attractive market, but its lending infrastructure poses challenges. Although emerging markets are often the space where clients can earn better returns than expected, the traditional markets, such as the US, have enjoyed nice upward trends in the last few years with increased specials activity.
There needs to be greater differentiation as to how securities are lent. Beneficial owners need to be flexible with collateral and agent lenders need to have sufficiently diversified borrower networks. These are key differentiators that will make securities lending more attractive in the market and allow it to attract more lenders to the programme. Our mantra has always been to have a world-class programme, to think ahead and be able to act quickly, be it to develop the product or make changes as a result of client requirements, the market or the regulatory environment.
Are borrowers and lenders happy with the Nordics as a revenue stream? How else can they boost revenue in the region?
Järvitalo: There have been many specials in the Nordics this year and our clients have been very happy. However, it will be challenging to justify the levels if the number of specials decreases. Most of our lenders understand the concept of a general collateral name but there are always lenders having a minimum rate of 1 percent or so, which is challenging in a general collateral environment.
As a firm, we are looking more and more into sending out baskets for a fixed period, which makes the revenue stream more predictable.
Daswani: Northern Trust continues to have a very strong presence in the region and can take advantage of the domestic market place where our clients are large holders in assets. From a macro perspective, declining global oil prices has been the catalyst for increased hedge fund interest in the Nordics, given the region’s exposure to this sector.
Additionally, Europe’s low interest environment has also been the catalyst for an increasingly level of capital raising within the region, all of which has created revenue attractive opportunities for lender and borrowers alike.
Overall, the Nordics continue to be a good source of revenue for clients that hold the right type of asset, particular those with greater exposure to small cap names. However, this is not dissimilar to other markets.
Wilson: The Nordic region has been a core and important market for J.P. Morgan for at least the last 15 years. This region is expects a certain standard from sell-side providers and consistency and commitment are essential for long-term success. We are very committed to this region and we are seeing the benefit from our long-term focus, which speaks to why we are considered to be the market leader across the region.
Which country is the most business-friendly, and how important is this to attracting business?
Daswani: It is something of a paradox that the more ‘non-business friendly’ markets can offer the most attractive opportunities for our clients. Hence, those lenders able to leverage their sophistication in technology, knowledge and infrastructure are best placed in gaining first mover advantage and capturing these revenue streams.
However, the simple answer here is that the most business friendly markets are the ones that are more developed or mature from a securities lending perspective. Conducting business today requires agent lenders to be nimble and, through strong technology platforms, offer scalable solutions in what may be deemed ‘non-standard’ markets for securities lending.
Northern Trust has a single global platform that is developed in house. This allows us to be quick to market when product development is required to meet the changing requirements and needs of the newer markets that have introduced securities lending more recently.
Wilson: We are comfortable with the requirements across all of the Nordic countries. In terms of trends, we have see some unbundling of lending from custody, most notably across Sweden and Denmark and this has been a positive development for our business.
It should also be noted that Nordic investors tend to be strong advocates of corporate governance for regional investments and assets, which needs to be integrated into the lending process.
Järvitalo: Our main advantage is that Finnish lenders are facing a Finnish counterparty, which makes things much easier from a tax reporting perspective.
Furthermore, the country of the borrower does not really matter as long as the local law recognises securities lending and it can be done under a global master securities lending agreement.
What collateral trends are you seeing in the Nordics, and how are they a reflection of what’s going on in wider Europe?
Wilson: There is a preference for non-cash collateral, including Organisation for Economic Co-operation and Development government bonds and equities, although we do see asset owners accepting cash collateral, too. Generally speaking, the requirements across the Nordic region are broadly in line with what we see across Europe as a whole.
Järvitalo: Unfortunately, cash collateral remains the only option for Finnish lenders given restrictions in the law. We are working actively to get approval from the tax authorities to be able to start using non-cash collateral.
Daswani: Individual clients have individual needs. They all have different risk and return requirements, and the way we have boosted our risk management capabilities and our ability to model different collateral types against the underlying loan has been outstanding. Maintaining the conservative nature of our organisation, we have become more comfortable with collateral flexibility than we were in the past, which also allows us to meet the demands of borrowers.
If a client has a profile that accepts cross-currency equity collateral, for example, we can do that. If a client wants to move to collateral transformation or liquidity swap-type trades, where they will accept lower grade collateral, then we can certainly provide that, too.
It has been a very robust and lengthy programme of collateral flexibility that we have embarked on over several years—not just for Nordic clients but for our global and diverse client base.
How do you expect 2015 to be for you or your clients in the Nordics?
Järvitalo: In 2015, we expect to get more lenders and borrowers onboard in Finland. Given our size, we are also looking at different ways to increase volumes. For example, we are going to start trading futures by the end of this year and we are also looking into the Eurex Clearing Lending Central Counterparty.
Wilson: We are optimistic about growth in 2015. We see good opportunities in all Nordic countries in 2015 and beyond, whether that be new asset owners coming to market or existing asset owners reviewing their current arrangements.
Overall in 2015, as the industry as a whole adjusts to the new norm, we anticipate that the demand side of the business will remain subdued but believe there remains good revenue opportunities and pockets of growth in capital efficient trades, such as upgrades and term.
Daswani: The business will continue to evolve. Next year will be a big year with the changing regulatory environment, and it is important to get this right, for us and for our clients. We have been actively monitoring the cumulative impact of global regulatory developments, and we continue to engage with regulators, federal agencies on these regulations either directly or through industry groups.
Borrower expansion in our programme will remain important because it helps to diversify risk and expands our opportunities to lend. This is another project that we have focused on and we have added several new borrowers to our programme in recent years.
And, as mentioned earlier, expansion in the types of acceptable collateral remains a priority. Collateral flexibility is important so that we can match requirements on the demand side, which will help to increase our clients’ revenues.
New markets to lend securities in will also be important. We commenced securities lending in Poland earlier this year, and there is a list of markets that we are watching.
Our ultimate aim for 2015 is to grow our clients’ revenues while maintaining our focus on risk and outstanding service, while maintaining expertise in this field and operating with integrity, all of which our clients have always enjoyed.