It’s been topsy-turvy year for securities lending in France, with regulations unbalancing balance sheets, low interest rates skewing seasonal trends and pan-European issues from tax to Target2-Securities (T2S) making waves throughout the continent.
According to DataLend, France has seen a significant drop in securities lending revenues over the last 12 months, with a particularly poor start to the year. Q1 saw a 45 percent drop in revenues year-on-year, while Q2 registered a drop of 38 percent.
Despite an 11 percent uptick in Q3, towards the end of Q4 things were looking less promising, with DataLend predicting another dip of at least double-digits at the time of writing.
The data provider did note that this is not out of line with the rest of Europe. Spain, Portugal, Belgium, the Netherlands and Greece all experienced similar downward spirals. In Europe, as of mid-December, securities lending revenues were down 19 percent, reaching $2.61 billion in 2015, compared to $3.23 billion at the same time in 2014.
David Lewis, Europe, Middle East and Africa head of Astec Analytics at FIS, doesn’t see anything unusual in the year’s activities, saying instead that the trends have “perhaps confirmed expectations for France and indeed other European nations”.
He adds: “Equities have followed a very typical pattern, seeing the European dividend season boost between April and June with the well-known September late-paying stocks adding their own blip later in the year.”
John Arnesen, global head of agency lending at BNP Paribas Securities Services, adds that, along with most European markets, securities lending in France has been affected by various opposing forces. He says: “Due to the prolonged period of low interest rates in Europe, asset owners have been focusing more than ever on investment solutions that generate incremental revenues on their assets, and securities lending continues to offer a balanced risk-reward solution for generating investment alpha.”
According to Arnesen, an increase in loan balances has been driven mainly by a demand to borrow fixed income securities, particularly French government bonds, which are categorised as top-tier high-quality liquid assets (HQLAs) under Basel III. As HQLAs, they’re in demand among those banks and broker-dealers looking to satisfy their regulatory obligations.
And this will only increase in 2016 as liquidity requirements come in to effect under Basel III, mandating that banks must hold enough unencumbered HQLAs in stock to cover their net outflows in case of any 30-day stress period.
Arnesen predicts an increase in the number of asset owners looking to securities lending as a means of generating additional income on their assets. Equally, asset managers will gradually enter back into the market as they adapt their strategies to comply with the new requirements. He says: “Asset owners are looking at securities lending as a means of generating additional incremental income on their assets, due to the continuation of the low interest rate environment in Europe.”
According to Arnesen, although European trends and regulations will have an effect on the French securities lending market, the impact will not necessarily be a negative one. Instead, he points to France’s relatively liquid capital markets business, saying: “Securities lending activity is important to the continued liquidity that is key to market participants.”
He explains: “Although we are witnessing a continuing trend towards tax harmonisation across European markets, institutional investors establishing discretionary securities lending programmes are benefitting from the increased level of control and flexibility they have over their programmes, while at the same time tailoring their programmes to deliver upside revenue potential from all available trade opportunities.”
At the same time, Lewis points out that, as of 2014, France was the third largest economy in Europe, only smaller than Germany and the UK. Therefore, he argues, France is more likely to affect trends in the rest of the continent, rather than the other way around. He says, however: “Having said that, the profiles of both fixed income and equity activity in France are similar to those we have seen in Germany through 2015.”
There are several regulations on the not-so-distant horizon, both in France and EU-wide. As Lewis notes: “All market participants need to be cognisant of them”.
He highlights the Markets in Financial Instruments Directive (MiFID) II, with its best execution and reporting obligations, and the Securities Financing Transaction Regulation (SFTR), with its trade reporting and transparency rules.
“Exact details of who should report what remain unclear.” says Lewis. “There are many other regulations that directly and indirectly affect the securities finance market, but as a data, analytics and reporting provider, MiFID II and SFTR naturally bubble to the top of our interest list.”
For BNP Paribas, Arnesen says, 2016 will be about fine-tuning its lending offering for asset managers in France, “to help them reach their lending objectives while becoming compliant with [financial markets regulator] AMF’s regulation”. He adds that BNP Paribas will “continue to invest in [its] technology infrastructure and expand [its] reporting capabilities in line with varying client requirements”.
But Lewis suggests a change in trading strategies across the board. He predicts efficiency will be “the name of the game”, with large-volume, low-value trades becoming more automated and higher-value trades remaining on the more manual side. “However, the ability to customise a trade to suit ever more specific needs does not preclude the need for extensive technology and automation, quite the opposite.”
To structure a trade, Lewis says, whether through a total return swap, a stock loan or repo, market players will have to manage their data and analytics more efficiently than they manage trading desks today, and therein lays the challenge. He says: “2016 and beyond will bring the need for multiple trade disciplines with balance sheet and collateral management all working together in real-time. This will be a significant challenge for our industry.”