How has the Canadian securities lending market evolved since the CASLA conference in Toronto last year?
Canada is the second largest securities lending market in the world with approximately CAD 1.36 trillion in lendable assets (according to Datalend, as at 25 May 2017) and active loans of CAD 166 billion, so the industry is mature.
The sector continues to focus on balance sheet and capital ratios as both affect borrower and lender behaviour, while the growth of non-cash capabilities, term and cash offerings and collateral optimal solutions for stakeholders remain front and centre.
The energy sector plays an important role in the Canadian economy and as the price of oil remains at suppressed levels, business investments continues to wane. The mining sector in general in Canada has seen lower initial public offering (IPO) launches as well as mergers and acquisitions (M&A) activity—both of which manifest demand in various ways in securities lending.
The demand for high-quality liquid assets (HQLA) continues to evolve with Canada being a large issuer of government and provincial debt, both of which are considered level one assets under the Basel regime.
What are the main challenges that CASLA is looking to tackle?
I would say that the challenges from 2016 remain in play this year. Our priorities remain:
• Collaborating with regulators and industry partners to implement change and support an efficient and secure marketplace
• Developing strong linkages with similar global trade associations
• Advocating for the common interests of securities lending market participants, including custodian banks, beneficial owners, asset managers and broker-dealers
• Educating the public about the role of securities lending in capital markets
We also continue to focus on regulatory themes that affect capital and leverage ratios and potential downstream impacts for all constituents, including banks, broker-dealers and agent lenders. Working on regulations affecting certain segments of the market, including mutual funds and the national instrument, continue to be priorities.
What makes the Canadian market stand out from its southern neighbour?
Canada is a very healthy securities lending market with utilisation rates on Canadian equities almost 60 percent higher than that of US equities. Historically, Canada has followed Europe in how its securities lending programme has been developed with non-cash collateral being the dominant form of collateral and the legal construct similar to Europe.
From a macro perspective, there is some uncertainty around consumer debt levels in Canada and its impact on the Canadian banks. Canada has been operating in a very low interest rate environment—slightly lower than the US.
It could be argued that Canada was overlooked in the past as a lending market. Do you feel it now gets the recognition it deserves as a strong source of revenue?
I wouldn’t say the market has been overlooked in the past but potentially viewed as a general collateral market concentrated in non-cash collateral. As the market continues to develop, collateral is diversified and the Canadian banks are putting more focus on growing their businesses south of the border and internationally. Cash collateral has been a growing space within the Canadian market with now more than 20 percent of balances versus cash. The specials market in Canada has picked up in the past year, which has contributed to stronger returns for beneficial owners.
The market continues to cope with balance sheet constraints and increased regulation where solutions within the securities finance space have played a role.
What are the top internal and external challenges facing the Canadian market today?
I think in addition to the themes mentioned earlier about the challenges that CASLA is addressing, continued regulatory pressure and their ongoing impact remains a challenge.
Securities lending is very much a byproduct of a healthy functioning financial services industry. From an external perspective, the current geopolitical landscape in the US creates uncertainty within the markets and has had increased pressure on the Canadian economy due to the future possible North American Free Trade Agreement changes. SLT