As an agent lender, what is RBC I&TS’ strategy for managing the sometimes differing requirements of beneficial owners and borrowers?
The RBC Investor & Treasury Services (RBC I&TS) securities finance programme focuses on delivering value and performance for our clients. This applies to both sides of the trade including supply (beneficial owners) and demand (borrowers). It’s consistent with RBC I&TS’s overall emphasis on client-centricity; client requirements are at the centre of our strategy.
The challenge is to optimise returns for beneficial owners based on their risk-reward profile, while also meeting the demands of our borrowers. Managing the needs of multiple stakeholders requires a high degree of open dialogue, combined with a detailed understanding of their specific objectives and requirements.
For example, the risk parameters of beneficial owners are driven by internal risk tolerances and regulatory requirements. Understanding these nuances and communicating the restrictions to borrowers is key to achieving an optimal balance.
At the same time, connectivity and understanding the changing needs of the borrower community help to provide transparency to the lender, and this is equally important. Delivering enhanced transparency has been a long-standing initiative at RBC I&TS. As agent lender, ongoing engagement with our borrower network helps ensure beneficial owners are aware of the lending opportunities that exist in the market.
How have the key drivers of industry participation evolved, and what impact has this had on RBC I&TS’s securities lending programme?
The nature of borrower participation has changed over the past decade, including a shift from equity to fixed income loans, which now comprise a higher proportion of the total loan value.
The demand for fixed-income assets has accelerated, along with the growing need for high-quality liquid assets driven by regulation, as well as increased financing/liquidity and collateral optimisation requirements. As a result of higher demand, beneficial owners are enjoying increased returns on their fixed income assets.
We have also seen an increase in the number of beneficial owners participating in securities lending as our custody clients continue to explore avenues to optimise un-utilised assets within their portfolios.
And the profile of beneficial owners is increasingly diverse across countries, regions and investment structures including varying regulatory requirements.
Given the changing needs of the borrower community, particularly relating to collateral, how are you helping beneficial owners adapt to these changes?
RBC I&TS supports its lenders through regular communication on the evolving market including demand-side trends, changing market practices and regulation, as well as the latest innovation and technology.
For example, a key market trend relates to increased demand for term lending in 30- to 90-day structures where loans consist of high-quality liquid assets versus lesser quality collateral. Educating beneficial owners on the various types of term structures (such as evergreen and extendables) and collateral types (such as equities and corporates) helps to optimise their assets, given these new demand scenarios.
Based on the changing collateral landscape, to what extent are beneficial owners open to wider ranges of collateral, given that default indemnity is typically offered?
Beneficial owners come in different shapes and sizes. It is important to understand each lender’s specific collateral requirements, as there is generally a wide spectrum when it comes to the willingness of beneficial owners to expand collateral in line with borrower demand.
Some clients prefer to limit their use of expanded collateral types even though an indemnity is in place, while others are keen to maximise revenue within indemnified collateral.
How has the recent implementation of T+2 settlement within North America impacted your beneficial owners and borrower counterparties?
In preparation for the transition to T+2 in Canada and the US, RBC I&TS made a concerted effort to communicate with our custody clients well ahead of the 5 September implementation date.
This ongoing dialogue helped clients prepare for the new shortened settlement cycle, providing sufficient time to implement the appropriate internal processes and accommodate the change.
A beneficial owner’s participation in securities lending should not impact the lender’s day-to-day portfolio management activity, and this market change was no exception.
During the lead-up to T+2, we also actively engaged with our network of borrowers to help them prepare for the shortened recall cycle in order to avoid failing trades and potential buy-ins. This open dialogue contributed to the seamless implementation of T+2.