UK
The UK’s securities lending landscape seems to be holding steady, but with the country’s EU membership under scrutiny, is there danger ahead?

As the UK gears up for a general election, it seems as if, when it comes to the keys of 10 Downing Street, this could be anyone’s game. Pre-election polls fluctuate by the day, the country is still reeling from the tight-as-they-come referendum on Scottish independence, and with the possibility of a vote on EU membership looming, this is a jurisdiction full of uncertainty.

In securities lending, however, Q1 2015 bucked the trend and followed a fairly stable pattern. According to data from DataLend, utilisation of securities kept a steady course for the most part, seeing gentle fluctuations between about 12 and 14 percent.

Mid-February saw a jump to just over the 14 percent figure, before swiftly falling to just under 12 percent, and this peak was repeated in early March.

The value of securities on loan mirrored this almost perfectly, holding steady between $100 and $120 billion, with the exception of two spikes that peaked at around $125 billion, while the dip in between fell to just under $110 billion.

The volume-weighted average fee statistics showed the same pattern again, but to a greater extent. The jump in February was more significant, jumping from about 24 basis points to a high of 37. It dipped to 34, and then swiftly to the 21 to 22 mark again. The spike was even more drastic in early-March, flying from 24 to 42 basis points, and back down again between 5 and 12 March.

While these considerable changes in the market could reflect the economy as a whole, company results or other external factors, what is clear is that the UK market doesn’t appear to be in decline. According to the UK equity centre, UK FTSE100 companies saw a dip in value from 6,950 to 6,700 between 3 and 12 March, followed by a steep climb to about 7,040 by 23 March.

This inverted pattern shows that as stocks dipped in value, lending increased, suggesting that one caused the other.

According to Simon Lee, managing director of eSecLending, the trends in the UK market are not noticeably different to any other area. Mainly, this is down to the same regulatory landscape applicable to the UK and continental European countries.

“Lenders in the UK face the same challenges, and can benefit from the same opportunities, as lenders in other jurisdictions,” he says.

“Understanding how the cost of regulation will affect their securities lending programmes is one of the main areas lenders will be focusing on this year, so as to ensure lender objectives around risk management and performance continue to be met.”

With such political upheaval on the horizon, one could expect market players to be a bit more flustered than they are. However, Andrew Dyson, COO of the International Securities Lending Association, believes that, realistically, the effects will be minimal.

He says: “The bulk of people who undertake lending are long-term investors themselves, and so wouldn’t necessarily be concerned with the relatively short-term event of the general election. Secondly, a lot of the investors who loan securities are domiciled outside of the UK so it’s not an immediate issue for them.”

Even if there are drastic changes in power, or even a referendum on the UK’s EU membership, Dyson doesn’t expect any immediate activity in the market. And those changes that will come about are too far away to even anticipate.

“If there were to be a decision to leave the EU, that will be quite a significant event but not just for securities lending, for the whole of the financial services market in the UK, and it’s very difficult to know what that would mean, because clearly it would mean quite a lot of change,” says Dyson.

“A new government could change people’s sentiment towards lending or even the geographical location in the context of the UK, but I think it’s far to early to have any details on that.”

One seemingly significant drive in the election is various pledges to increase or relax regulation on the financial industry. However, particularly when it comes to securities lending, a vast majority of the regulation is actually imposed by European institutions, and it’s this regulation that really drives the market.

Dyson says: “We’ve seen a swathe of regulations coming through over the past two or three years as a reaction to what happened in the global financial crisis. Consequently, the market is weighed down quite a lot by regulation. The question at the moment its whether we will struggle to deal with any more.”

“It will be interesting to see what happens over the next year to 18 months as the market absorbs and deals with those regulations. I think they do present opportunities, and those lenders and borrowers who think creatively will create interesting revenue opportunities.”

Again, it comes back to what could happen in the case of the UK leaving the EU, and what the jurisdiction could end up missing out on as a result. In February, the EU issued a paper proposing a move towards a capital markets union, building a single market for capital and encouraging investment for the long term.

In a speech to the European Parliament committee for economic and monetary affairs, Jonathan Hill, member of the European Commission for financial stability, financial services and capital markets, said: “A single market for capital will benefit the whole European economy, helping to unlock the capital that is currently frozen and putting it to work to support Europe’s businesses, particularly small and medium-sized enterprises and start-ups.”

“We want to remove the barriers that stand between investors and investment opportunities; and we want to make the system for channelling those funds more efficient.”
Economically, the EU seems to have a strategy in mind, moving from the alliance funding model typically seen in Europe towards one more reminiscent of that in North America.

Hill specified: “If EU venture capital markets were as developed as in the US, companies would have been able to tap into an extra €90 billion of funding between 2008 and 2013.”

Whether the outcome of the general election leads to an EU referendum or not, it seems clear that, while they’re not particularly worried, industry players tend to back the strategies of the EU, regulations and all.

Lee says: “The evolving regulatory environment presents opportunities for lenders in the UK, as it does elsewhere. Particularly, it can benefit those lenders that participate in term transactions and those that can accept a broad range of collateral types.”

Dyson agrees, saying that, while a referendum could lead to changes, it is important to avoid moving backwards, and look forward to a more effective future, whatever that might entail.

He says: “The capital markets union is a signal that now is the time to think about how we take things forward, rather than just looking backwards at what has happened in the past.”

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