BNY Mellon: the leaders unite
BNY Mellon’s global leadership team for securities lending discusses reorganisations, markets, business and the future
There was the creation of global collateral services, then the more recent creation of BNY Mellon’s markets group. What’s changed?
Robert Chiuch: This may be the first time our global leadership team has appeared in a single roundtable event. I’m obviously very proud of the team and thrilled with this opportunity, so thank you for the kind invitation.
With BNY Mellon’s role in the financial markets and given the global clients we serve on the buy and sell side, our executive team long ago recognised the need to design for the whole of the investments lifecycle. Our clients are faced with new regulatory and capital constraints that affect their business and investment strategies. We launched global collateral services in anticipation of those initial regulatory developments, recognising that we would evolve that business model to help our clients adapt to these new realities. While collateral is a large component of our business, BNY Mellon has been uniquely positioned to align a number of related capabilities.
Enter the markets group. To that end and to be effective in the collateral/financing markets space, all the other pieces (ie, front- and back-office operations) are in place and operating smoothly as a single team that now incorporates foreign exchange, capital markets and so on. It may seem simple enough to say but the alignment was a massive undertaking and a terrific accomplishment for a firm of our size. It doesn’t hurt that our clients are delighted either. It’s amazing how people and strategy can come alive when enabled by a strong management team, good technology and cross-enterprise teamwork and collaboration.
For perspective, we touch one-fifth of the world’s assets and service numerous central governments. The markets group offers an holistic approach to serving our clients as they cope and adapt to ever-changing regulatory requirements.
How is this going to help your clients? Are you more competitive?
Chiuch: The global marketplace is evolving. Just look at the changes that have taken place in the last five years—it’s extraordinary. So for us, with the design for the markets group, we can help clients at every point in the investments lifecycle. It’s the ability to apply our global expertise, service excellence and strategic solutions to help our clients as they wrestle with regulatory-related changes that can be ultra complex and expensive. And it must be said that nimbleness and execution are critical.
We talk with our clients every day. Here are just a few things they are buzzing about lately: high quality liquid assets (HQLAs), alternative forms of collateral and financing, optimisation, access to greater supply, and data-driven insight. With the markets group, we have enterprise-level attention, deep expertise, terrific problem-solving and global resource capabilities. For instance, this includes our services and solutions around liquidity and optimisation.
With approximately 20 percent, or roughly $28.5 trillion in assets under custody and/or administration, we don’t see a shortage in collateral, but rather a potential shortage of access to high quality collateral. Clients want smart solutions that can be globally coordinated. We have a team of 30-plus traders who work as a single unit and represent the whole of the enterprise. It’s very powerful—the team’s agility and speed of execution are possible due to having talented people and investments
Competitors may try to cite size as a challenge to optimal performance; however, our size grants our clients better and broader access to global markets, more stable and diversified holdings, better distribution and more diversified earning streams across eligible asset classes, and the confidence of dealing with a high credit, quality counterpart that is a global brand.
Has the world been receptive to these reorganisations? Have they been easier to communicate in some markets than others?
Phil Zywot: The Canadian market has been very receptive to our organisational changes as it has allowed for the streamlining of our product offerings, plus we’ve aligned the various internal teams and departments to best support our securities finance industry clients.
Richard Marquis: For the Americas, the same is true and the feedback has been extremely positive. Our alignment also expands the touch points between BNY Mellon and its clients throughout the investments lifecycle. For example, look at our tri-party team and the securities lending desk—both have been able to benefit from this symbiotic relationship in an environment that’s focused on balance sheet optimisation.
Simon Tomlinson: Driven by the market forces at play, our approach brings key areas together. So the smart alignment of FX, capital markets, collateral management and securities finance also positions us for new and emerging opportunities.
Paul Solway: Global collateral services paved the way for the markets group, with both being true over-the-counter markets and with a number of common clients. We can better leverage and share our expertise with our clients. We’re still growing in the Asia Pacific region, so the markets group supports the firm’s overall cross-sell capabilities and opportunities.
Pat Garvey: With regard to the Americas, and in the two years since I joined the firm, the changes have been seamless and very well received by our beneficial owners and broker-dealers.
Howard Field: Yes, on the whole, borrowers have been receptive to the markets group. They understand that in this new environment we are uniquely positioned to bring these capabilities together. We have solutions for all clients, depending on whether they are long or short cash, bonds or equities. The BNY Mellon markets group isn’t simply a name change. It’s much more strategically-oriented in support of delivering across the investments lifecycle.
BNY Mellon formally integrated the team from its Canadian joint venture, CIBC Mellon, and that book of business on to your platform. What have been the benefits internally and for clients?
Zywot: I believe the results have been very positive for our clients and for our joint venture partners, too. Perhaps I’ll step back for a moment just to clarify what occurred. We lifted out the securities lending trading team and formally joined BNY Mellon. The traders, including myself, are BNY Mellon employees. And CIBC Mellon, the joint venture, remains very successful and well regarded in Canada.
Rules for beneficial owners and borrowers in Canada sometimes differ from those of their US counterparts in everything from, for instance, collateral flexibility to tax rules. The benefits for our buy-side clients include significantly enhanced access to broader and more global distribution channels, while leveraging BNY Mellon’s global technology, infrastructure and market access. Additionally, the sell side clearly benefits with more convenient access to a broader pool of assets and market capabilities.
What changes have been made in terms of reorganisation in Asia?
Solway: While not necessarily groundbreaking, our Asia Pacific businesses are being viewed as a real growth opportunity, especially in the context of current markets. Fundamentally, we’re paying special attention to our product mix and making changes as required, notably in Hong Kong, Japan and other markets.
We’re also deeply focused on ensuring the right people are in the appropriate roles to assist clients, as well as to identify and capture opportunities. More specifically in our space, Mark Millitello is the regional business manager for the markets group and I’ve taken on an incremental role, too, as the regional head of securities finance. There’s lots of cautious excitement, if I can use that phrase, around new markets, particularly China. We like the Asia Pacific region.
In Asia, what inroads have you made into countries such as Taiwan and China, from a fixed income and equities standpoint?
Solway: Equities in Taiwan. This is going well, but the market still faces access challenges due to structural and operational restrictions. Additionally, quotas, borrow pre-matching, short-sell restrictions, tax reporting and dividend reporting are also areas to watch. Overall, when funds are potentially unable to sell their full positions immediately remains the biggest impediment there.
For equities in China, we are carefully watching developments. The Hong Kong-Shanghai Stock Connect is exciting, but still prevents offshore participants from qualifying for physically borrowing or lending. However, the velocity of change is encouraging. Most recently, the MSCI announced further encouraging reforms that move us closer to an independent market for Chinese securities.
Field: We continue to explore emerging market debt opportunities as they arise and we’ll engage when those opportunities make sense for our beneficial owners.
Do the fixed income and equity teams work closely together? What has changed to enhance and streamline day-to-day operations?
Chiuch: Yes, in short, our equity and fixed income teams work very closely together. In a manner that’s not dissimilar to other market participants, a combination of deteriorating market conditions and new regulations, led us to bring the teams under a single management structure and I was assigned the global fixed income business, as well as the global equity business. Working together often takes on new meaning under a single reporting line.
That said, this team made the transition successfully and without hesitation. Interestingly, HQLAs came back in vogue around that time. It was great to see our two teams fully coordinating their activities to better manage the balance of trade across our products and asset classes to ensure the optimal use of capital and resources. What I’m seeing is accretive, ie, better for both teams. And, although such change could seem less than newsworthy, it’s easier said than done in any large organisation. Some of the other benefits are better communication, strategic alignment, accountability, and a culture that is thriving.
What do you see as some key themes facing the industry?
Zywot: Regulatory change, both globally and locally, continues to re-shape and re-define the securities finance industry here in Canada. The evolution of collateral continues to also play a large part in Canada. Over the years, the Canadian market has gone from almost being strictly a non-cash sovereign debt collateral market to more of a balanced European model with cash and equity collateral playing a much bigger role. We continue to work with and educate beneficial owners on the potential risk-adjusted returns of alternative forms of collateral.
Another major theme is technology. Canada has been a slow adopter, preferring to wait and implement proven advancements. However, in the past few years, Canada has made great strides in catching up to our American neighbours in the use of AutoBorrow, contract compare, front-end systems and tri-party collateral facilities.
Marquis: I’m guessing this will be echoed globally, but ratios and acronyms are the obvious answer to me: SLR, LCR, NSFR, and so on and so forth. From our standpoint, it’s how do we solve and price this for broker-dealers. Also, the net capital requirements for brokers and dealers, and the developments in the US will have a clear impact from the perspective of what brokers can pledge. Legislation such as the Employee Retirement Income Security Act will also require modification to fit into the new demand cycle, or such funds could be moved to intrinsic lending.
Tomlinson: Regulation has been the key theme globally for some time now and that has not really changed. There are still many challenges to come such as the introduction of a wider Financial Transaction Tax, which is still under discussion. Also, the settlement discipline regime under Central Securities Depositories Regulation, which brings with it some definitive changes, and the central counterparty (CCP) conundrum and the introduction of NSFR—due in January 2018—to name just a few.
Solway: For me, the key themes will be: the International Securities Lending Association best practice paper regarding proof of authorisation of fund lending; regulations requiring market participants to revisit distribution channels; revenue versus risk in the remaining emerging markets and whether the potential cost justifies the build; the consolidation of fixed income and equity teams; and automation and the speed of execution.
Garvey: The regulatory environment is creating the need for balance sheet neutral trades, or upgrade trades, such as treasury/equity. Overall, collateral flexibility by our beneficial owners is a critical element for navigating the compliance maze. If beneficial owners don’t expand their collateral schedules, they are limiting their earning potential. To address this, we are continually educating our beneficial owners as to those trades that most effectively monetise their assets, given existing market conditions.
Field: I echo Pat’s comments. You’ve got to consider trades that won’t blow the balance sheet.
Basel III ratios have added new challenges to balance sheet management and capital cost. How is this affecting BNY Mellon?
Chiuch: BNY Mellon is not alone with respect to contemplating and acting on these new rules and regulations. We also recognise the potential impact on our clients, too. The obvious considerations revolve around counterparty risk, balance sheet usage and capital costs under the Basel III rules and the US Dodd-Frank Act, to name two. It’s been suggested by top industry thought leaders in the regulatory space that US regulators view the Basel III rules as a basis for future US rules and that we’re currently only about half way through the process.
Recent updates suggest that the US is revisiting rules around large counterparty exposures, as well as NSFR in the context of linked transactions. There is thoughtful consideration of regulatory arbitrage, as well as a greater focus on prudential enterprise risk management (ERM). The Basel III rules are said to be further evolving from the standard calculation of 20 percent for banks and 100 percent for non-banks to a matrixed model that might contemplate asset class and risk exposures in determining margin. The list goes on.
The implications are that these industry changes are secular in nature. Generally, higher costs associated with compliance and administration, capital allocations and the ability, or lack thereof, to attract risk weighted assets that would inflate the denominator in the key leverage ratios will have to be more deeply considered than in the past as traditional business cycles take on new life.
How are repo markets doing at the moment, and what are the most pressing regulatory concerns for the business?
Chiuch: Less balance sheet, more non-cash, industry shrinkage and wild swings in liquidity in rates due to global forces attributable to global quantitative easing siphoning liquidity out of local markets (i.e. recent volatility in the German bond market) contribute to repo market challenges, over and above market levels.
Can you all share any predictions for the next 12 months?
Zywot: With mergers and acquisitions (M&A) activity being up 21 percent in the first quarter and a recent increase in the threshold amount for Canadian governmental review of foreign acquisitions, this could potentially spark some interest in foreign takeovers in the small cap space, particularly in the depressed resource sector.
With Canada being one of the few remaining AAA-rated countries, we expect to see continued demand for Canadian government bonds.
We also expect to see a strong focus on balance sheet-friendly trades to continue with an increased focus on term structures and collateral upgrade trades.
Marquis: Looking deeper into 2015, the growing importance of non-cash collateral and the advantage non-US funds have over many US-based funds with regard to acceptable collateral cannot be overlooked. Regulations haven’t created a level playing field.
The lack of specials for typical intrinsic lending seems to be a theme that is not going away any time soon and, therefore, the importance of the warm and general collateral should not be underestimated.
That said, I echo Phil’s comments that there is a decent pipeline of M&A deals in the US moving into late 2015 to 2016.
Tomlinson: The next 12 months will be interesting for Europe, the Middle East and Africa. Several of the key issues that I mentioned are looming and could have a considerable effect on business depending on their scope.
These aside, the use of CCPs is likely to become more prominent, non-cash will continue to dominate with the need to match term increasingly important, and scrip dividends will continue to be in vogue.
Solway: Watch China carefully, particularly the Stock Connect programme and developments from the MSCI. This will likely determine the pace of evolution regarding offshore participation. Other themes include: Japan and Hong Kong to continue to dominate flows; and South Korea has made a come-back since the ban in 2008 to 2011, and continues to gain in interest for hedge funds.
Also, the energy story will continue—nuclear (Japan), solar (China) and commodities (Australia)—which is the sector of focus, followed by technology (South Korea/Taiwan) and transport (shipping flows, rail-links and airlines).
Garvey: The need for non-cash trades, which are balance sheet neutral, are increasingly in high demand due to the myriad regulatory hurdles that clients are facing. We anticipate the non-cash component of our book will continue to grow in the next 12 months as both beneficial owners and broker-dealers adapt to these market and regulatory changes.
Field: Non-cash trading in term is the way forward. The book has changed from 70/30 in cash to 70/30 in non-cash and this trend won’t be reversed in a hurry, certainly not in the low interest environment.
Chiuch: I would expect to continue to observe a secular shift in collateral flows and pricing. Recent news of possible changes to SEC rule 15-c-3 would likely diversify flow currently occurring outside the US. Pricing will more accurately reflect the impact of attracting capital as the broader community comes up to speed with evolving regulations.