Our Insights

A sophisticated market: current trends and opportunities in Canada's securities lending market

Kyle Kolasingh, Associate Director of Securities Finance, participated in a panel discussion on current trends in Canada's securities lending market and opportunities on the horizon over the next 12 months. 

What trends are you currently seeing in Canada’s securities lending market?

Kyle Kolasingh
Associate Director, Securities Finance,
RBC Investor & Treasury Services

The Canadian securities lending environment is experiencing rapid change on multiple fronts--from evolving collateral management practices to accelerating technology enablement. In addition, regulation is driving increased demand for financing and balance sheet optimization and, in turn, High Quality Liquid Assets (HQLA). This latter trend stands out in today’s securities lending market where subdued levels of special activity (i.e., intrinsic value opportunities) continued into 2019. As global financial institutions look to bolster liquidity requirements, the demand for HQLA and, specifically, level-1 assets on various term structures, is particularly strong. Coupled with beneficial owners’ growing awareness of the alpha-generating potential of such transactions, HQLA lending is expected to continue trending upwards, contributing to overall outperformance of fixed income assets in the securities lending market.

Are we seeing a growing use of non-cash collateral?

Yes. Balance sheet efficiency is taking on growing importance in today’s environment. This is driving an increased focus on the impact of securities lending transactions on risk-weighted asset exposures and capital ratio requirements. As a result, we are seeing higher demand for non-cash collateral and the expansion of such collateral to include additional equity indices, American Depositary Receipts (ADRs) and Exchange-Traded Funds (ETFs). Participants in the Canadian market have traditionally been at the forefront of using non-cash collateral and, as the securities lending market continues to evolve, we see other markets, including Europe, trending closer to the Canadian collateral landscape.

What regulatory restrictions exist around collateral usage?

In Canada, mutual funds are regulated by National Instrument 81-102-Investment Funds (NI 81-102), which has a narrower scope of eligible collateral than Office of the Superintendent of Financial Institutions (OSFI) B-4, which provides guidelines for other market participants such as operating memorandum funds, pension plans, insurance companies, and government institutions. As the market increasingly moves towards non-cash collateral and, specifically equities, the current limitations associated with NI 81-102 stand to reduce access to lending opportunities where collateral flexibility is paramount. It is important to note that discussions are continuing within the industry to help level the playing field for all participants.

How is technology impacting securities lending?

Technology touches upon almost every aspect of the industry—from the way we transact to how we price trades, monitor risk and interact with our lenders. As a result of RBC I&TS’ focus on connectivity, the majority of our transactions are automated. This supports a high degree of straight-through processing and allows our traders to focus on high-intrinsic value opportunities. Additionally, technology advancements, combined with enriched data sets, are enabling beneficial owners to make quicker and more informed decisions. As lenders become increasingly involved in their securities lending programs, powerful data visualization tools are being developed to provide insights on performance, program parameters, and risk management. At the same time, application programming interfaces (APIs) are delivering meaningful data sets across organizations in an efficient manner. This has enabled lenders to take a more proactive approach to lending and uncover opportunities, such as corporate action optimization, to quantify restricted or non-lendable assets and create further alpha generation.

What opportunities are on the horizon for Canada’s securities lending market?

We continue to see greater participation in securities lending programs among our clients, combined with a shift to a more granular and consultative beneficial owner-agent lender relationship. The industry has experienced substantial change since the 2008 financial crisis and, concurrent with developments in technology and risk management, an increasing number of beneficial owners are either returning to securities lending or opting to participate in lending programs for the first time. Whether it’s to offset costs or to take advantage of leverage strategies, beneficial owners are looking for closer relationships with their agent lender and a deeper understanding of the dynamics of lending. At the same time, asset managers are increasingly looking to securities lending as a means to reduce fee structures and increase competitiveness. This is enabling managers to capitalize on greater intrinsic value opportunities, helping to dispel the traditional negative connotations associated with short-selling and securities lending. I should mention that, while these changes are occurring in Canada, many are being experienced globally as well.

Originally published in the CASLA Conference Special edition of Securities Lending Times.