Cookie policy

By pursuing your navigation on our website, you allow us to place cookies on your device. These cookies are set in order to secure your browsing, improve your user experience and enable us to compile statistics. For further information, please report to our cookie policy.

Article (2/428)
Unlocking the hidden value of my portfolio
Unlocking the hidden value of my portfolio
Back

Unlocking the hidden value of my portfolio

06/12/2017

Natalie Floate

Natalie Floate

Head of Market and Financing Services Asia Pacific

BNP Paribas Securities Services

View profile

Natalie Floate, Head of Market and Financing Services Asia Pacific, BNP Paribas Securities Services, discusses the most common questions from clients on securities lending

In the current low interest rate climate, asset managers have found themselves working harder for less in a bid to enhance the overall return of their funds.  A subdued interest rate outlook compounded by mounting regulatory costs have incentivised beneficial owners to search for additional yield via low risk solutions – and this is why securities lending is back on the agenda for many.

What level of incremental income can securities finance potentially generate for my fund?

When discussing securities lending, the incremental revenue potential derived from securities lending is one of the first questions I am often asked by portfolio managers. This question has become of paramount importance to underlying investors and policy holders and is soon followed by questions on the underlying process.

In short, the securities lending process involves making a temporary loan to a broker approved by you - the manager, on a fully collateralised (with margin) basis for a fee accruing over the lifespan of the loan.  Can I sell my securities? - yes.  Will I still receive dividends and be able to vote on corporate events? - yes.  Can I vote if I want to? - yes, but we have to recall the security once you decide to vote. Whether appointing an agent to lend your securities or combining the activity with your custodial functions, the two activities have been structured by the market to complement each other and with the needs of institutional investors in mind. And what are these needs? - protection of capital, protection of income and no failed trades or disruption to your core investment activities.

The role of securities lending has changed over the years.  There has been a shift away from the focus on returns derived from the reinvestment of cash collateral to a focus on the intrinsic value of the security being lent. Lending US and European government debt has always been one of the key, stable loans in the High Quality Liquid Assets (HQLA) market. With accelerating regulatory change increasing the demand for HQLA and hence the need for collateral – far flung countries with strong credit ratings like Australia and New Zealand have begun to make the 'most wanted' list. Fixed income portfolio managers suffering from low yields suddenly have a new source of revenue - an additional 5,10,15,20 or more basis points depending on what form of collateral they  accept and with whom they trade with. These returns help their funds offset fees, absorb the new costs of regulations or stay just on the right side of the benchmark.

How will I know who has my securities?

As the Lender you decide who to lend to. You should have full visibility of what is on loan, who your counterparties are, fees, tenure, collateral types and mismatches. Flexibility has become important as funds have become more sophisticated. Restricting individual securities, putting limits on individual borrowers, managing liquidity versus daily average turnover volumes has become standard practice in the securities lending market.

How do I know if I am getting the biggest bang for my buck?

It is important to ensure that the securities lending programme that you have is the right programme for you from a risk perspective first and foremost. The guidelines you apply will have an important impact on your revenue. If you lend HQLA against cash collateral only, your assets will be less attractive for lending purposes versus another fund lending the same HQLA against G7 equities as collateral. The borrower will opt for the latter and will pay a higher fee to reflect the credit mismatch between government and corporate bonds.

I am in a lending programme, what now?

Are you being asked to add new borrowers? Accept new forms of collateral? Lend in new markets? Term loans? If not, you may not be optimising the potential revenue from your portfolio. Are you receiving market colour as to what is trading at what levels in the securities finance segment? If not, your portfolio managers may be missing out on some market colour that has value to them.

What are you asking me to change?

This is a question I often hear from my clients. It may mean updating a legal agreement or making a proposal to their investment committee - yes, I am giving them a one-off task. But what I am really giving them are options and this is the key - they can say yes and make a change to their programme and expect to see the benefits, or they can say no and maintain existing programme parameters.  Irrespective of their decision, we will both have the comfort of knowing that we have all been working to increase the overall performance of their funds.

Follow us