The potential to generate additional returns through securities lending is becoming increasingly attractive to beneficial owners as they grapple with economic uncertainty and low interest rates, compounded by competitive pressures and regulatory change. This is resulting in growing demand for innovative, agile approaches as the next generation of securities lending takes hold.
Common goal, different approaches
Kyle Kolasingh
Associate Director, Securities Finance
RBC Investor & Treasury Services
While the alpha-generating potential of securities lending is a common goal among beneficial owners, they have several options for implementing a lending program within their organizations. With a passive approach, lenders delegate much of the program execution and day-to-day activities to their agent, retaining responsibility for oversight. On the other hand, beneficial owners—often the larger players—may prefer to integrate securities lending within their daily investment strategy. This more active approach requires a suite of solutions that goes beyond traditional securities lending to include leverage, funding and other more advanced optimization strategies. Regardless of where a beneficial owner sits on the passive–active spectrum, agents must be able to tailor their services based on the lender’s specific requirements.
Enabling through automation
Automation is key to meeting beneficial owners’ increasingly diverse and demanding securities lending needs. At RBC Investor & Treasury Services (RBC I&TS), we have implemented a high degree of automation within our lending program by developing tools that facilitate more effective pricing of warm and hot specials, and enhance the structuring of duration-type equity and fixed income trades. The combination of vast amounts of data with new analytical tools is helping to ensure that trends are identified in advance of major market shifts to feed smarter pricing models. This is in addition to our ongoing use of the Next Generation Trading (NGT) platform. NGT has improved overall connectivity, enabling our trading desks to focus on high-value opportunities such as capturing spreads on corporate action events. Resultant gains in efficiency have contributed to improved trading performance and the potential for increased on-loan balances.
We have implemented a high degree of automation within our lending program
Automation and stricter regulation are increasing efficiency of the settlement and recall processes―vital to a successful securities lending program. In today’s environment, agents and borrowers are navigating increasingly compressed market settlement structures. Automation has significantly improved notification timeliness and RBC I&TS’ ability to track on-loan asset metrics across our counterparty network. This goes hand-in-hand with new regulation, including the European Union’s Central Securities Depository Regulation (CSDR), which will introduce more stringent settlement requirements and the imposition of economic penalties on counterparties with failed trades.
Data as the new gold
Data is increasingly perceived as the new gold
New regulatory requirements for enhanced transparency, along with improved access to data and technology capabilities, have increased lender expectations around data availability and heightened the importance of extracting actionable insights from this data. Traditional requirements for basic transactional reporting on a relatively infrequent basis have evolved to include demands from beneficial owners for an array of timely, sophisticated reporting capabilities. In response, RBC I&TS continues to roll out a suite of analytical tools across our regional trading desks, aggregating internal and market data to identify trends and price them appropriately. Data is increasingly perceived as the new gold.
Risk management at the forefront
Regardless of the approach taken by beneficial owners to implement a securities lending program, the safety and security of assets continues to be paramount. As market infrastructure and regulation evolve, lenders need to be confident that a robust risk management framework is in place that reflects their particular risk profile. Beneficial owners must also have confidence that their agent possesses the necessary strength and stability to deliver value from securities lending.
Emerging trends
In today’s competitive environment, it is not surprising to see various lenders taking a more proactive role in their lending program. For example, beneficial owners could view securities lending as a mechanism for internal funding and leveraging long positions for internal short facilitation, leading to reduced costs and enhanced returns. This works particularly well in situations where beneficial owners have incorporated hedging into their investment strategies.
Similarly, directed lending has emerged―primarily among sophisticated beneficial owners, who are looking to achieve efficiencies. Lenders adopting this approach continue to leverage an agent’s infrastructure and custody network, while forgoing indemnification and assuming responsibility for collateral management and the associated risks.
Agile solutions in dynamic times
While the fundamentals of securities lending remain unchanged, the potential to generate even greater returns is spurring demands from beneficial owners for innovative lending solutions during these uncertain and competitive times. In response, agent lenders are automating services to improve efficiency, accommodate new regulation and provide tailored programs to clients. As their needs continue to evolve, beneficial owners will require an agile, innovative agent, who partners with them to embrace the next generation of securities lending.