It’s an insurance company. It’s an asset manager. It’s a superannuation fund!

Super funds are again looking to securities lending as a source of incremental revenue, says Natalie Floate of BNP Paribas

In Australia, we are seeing a change in approach and appetite for securities financing products from superannuation funds. This has been driven by the general return to focusing on fund performance after several years in which the agenda has been dominated by risk management and regulatory change.

Super funds and other institutional investors have been managing an unprecedented amount of regulatory change since 2009, and have had to focus on this while also undertaking their own risk assessments and general risk reviews following the Lehman Brothers default in 2008. How did their portfolios manage the market stress? How effective were their risk management and hedging strategies? What was the liquidity risk for the fund and how could they mitigate the impacts should the same situation occur again in the future?

Globally, the regulatory focus was on risk management, capital protection and transparency of risk for investors. In Australia, the regulators added another element—choice for investors. This entailed a suite of regulatory changes that introduced flexibility for investors to switch their superannuation plans easily between providers, or to opt out of the traditional super fund model and set up their own self-managed super funds. This element of choice resulted in fees charged by superfunds becoming a major discussion topic.

So today our super funds are under pressure to perform well while reducing costs. This has timed well with the securities finance sector and particularly securities lending, as market participants have worked hard since 2008 to increase awareness of their activity, specifically what drives borrowing and lending, as well as the size of the market. A number of major markets such as Australia have introduced daily reporting via their local clearinghouses of all securities lending and borrowing activities. Individual lending agents have worked with clients and prospects to increase awareness and knowledge of securities lending activities—the risks to be managed and the potential returns.

What are we seeing today? We are seeing a stronger pipeline for securities lending than ever before, and having detailed discussions with super funds as to the drivers for revenue and on what assets to lend and collateral to use, factors to managing borrowers and liquidity, and tenor risks in reinvestment. In regards to international lending, we are seeing strong returns globally for high-quality government fixed income assets that qualify as ‘high-quality liquid assets’, particularly against non-cash collateral. In regards to equities lending. we continue to see strong demand for US, Hong Kong, Japanese, South Korean and Taiwanese equities held by Australian investors.
Collateral is where we have seen the greatest change. Before 2008, the lending market was made up of around 80 percent cash collateral. Today, it moves around 50 percent and this suits many of the super funds well.

At BNP Paribas, we can lend versus cash or non-cash collateral. For some of our clients, we work exclusively on a non-cash collateral basis (for example, lending a bond versus an equity as collateral), removing their need to monitor reinvestment risk. For some of the larger funds with more experience in securities lending and often an in-house investment team, we are seeing requests for more reinvestment options and in some cases directed lending support.

This is when we are acting as a traditional agent lender but the client may have agreed some trades directly with brokers, but wants to leverage our infrastructure in regards to loan servicing, such as settlement, mark to market and income/event protection. We are also seeing more internal governance on the fund side, including monitoring of our activities and questions during service reviews.

In summary, I would say that the super funds are again looking to securities lending as a source of incremental revenue—either to improve performance or reduce operating costs. Having flexibility in providing securities lending services to these funds is critical, as they are more precise these days and their lending agent needs to be able to manage a bespoke programme as no two super funds in Australia are alike.
The latest features from Securities Lending Times
As regulatory demands for data sharing begin to mount, the securities lending industry is sleepwalking into a nightmare of cyber exposures—as one agent lender has already discovered
As the introduction of regulation continues to affect how each firm manages their capital, financing and liquidity decisions, the need for control remains paramount. Stephen Michael and O’Delle Burke of J.P. Morgan explain
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
Coming off the back of a record year in 2015 in terms of revenues, the last two years have been more restrained in the Hong Kong securities lending market. Madalin Prout of FIS Global explains more
Although MiFID II has had no immediate effects on the securities lending market, industry participants suggest that the real looming effect of MiFID II will come in the form of SFTR
A view of the forthcoming regulation by Dean Bruyns of Broadridge
Collateral trends, risk management and central counterparties were debated at the 24th Annual Beneficial Owners’ International Securities Finance & Collateral Management conference
MiFID II is behind us, but SFTR and CSDR lie ahead. The message from the Deutsche Boerse Global Funding and Financing Summit is that not the time to take your eye off the ball
Tonia Noschese offers an insight into automation in the lending industry and ISLA’s current rules surrounding billing, payments and exposure
Country profiles
The latest country profiles from Securities Lending Times
After a decade-long isolation under the interventionist Fernandez’s administration, Argentina’s securities lending activity almost here at last
Luxembourg is a household name in securities lending due to hosting a substantial portion of asset-rich UCITS funds. Jenna Lomax assesses how Luxembourg’s recent market developments could be a major windfall
Asset Servicing Times

Visit our sister site
for all the latest asset servicing news and analysis
The German securities lending market is weeks away from the introduction of a new tax on dividend income that may drive participants out the market
Francisco Thiermann of IBM says the imminent launch of Chile’s securities lending blockchain solution will provide a shot in the arm for the market
Zubair Nizami, head of Asian securities lending trading at Brown Brothers Harriman talks to Drew Nicol about the state of the industry in the region
Being an exciting emerging market is all well and good, but how long can that status really apply before interest wanes? India is doing its best not to find out
Hugh Leonard, director of repo sales at Australia and New Zealand Banking Group, explains how the Australian market has excelled in recent years
Securities lending is in a strong place in Australia. Dane Fannin, head of capital markets in the Asia Pacific at Northern Trust, explains the available opportunities
The latest interviews from Securities Lending Times