EU Beneficial Owners Roundtable 2022: setting the scene

EU Beneficial Owners Roundtable 2022: setting the scene

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The full discussion features in the video below.

Stephen Kiely, BNY Mellon: 2022 we see as being a year where there’s going to be some giving and some taking. We’re seeing no real directional shorts in the market right now, and it’s benign from that perspective. That’s on the equity side. On the fixed income side, the rate hikes are going to help in the US and in the UK. German bunds are still strong - they’re always there or around that level. But with some things, we’re still not back to a sense of normal. I think scrip levels are still down, most people are still seeing that and that hasn’t come back from its pre-COVID levels. We’re expecting dividend distributions to be up more this year, now that those bans have firmly gone away, and things should be looking up a little bit. If there’s any light coming, it will be in M&A and general corporate action activity. If we were sat here this time last year, we probably wouldn’t have been talking about Naspers and Vivendi, which turned out to be the two biggest specials in Europe last year, so I wouldn’t be surprised if there wasn’t something like that at some point this year.

Nick Davis, J.P. Morgan: We know that securities lending caters for volatility. As already mentioned, 2021 was a good year for the industry with an increase in balances and flow as the benchmark providers have shown, but at the same time, there has certainly been changes in the marketplace. For example, in the US, hedge funds were rotating out of tech and more into index-based names especially in Europe. From that perspective, when the primes are looking to cover their shorts, you’re looking at internalisation first before going to the agent lenders. Therefore could we have seen more balances if this change hadn’t happened? From a corporate action perspective, it was again very positive. 2021 saw an increase in SPACs out of the US, IPOs, cap raisings etc. During that period, we also experienced the Meme phenomenon, with hedge funds. This impacted directional specials because of the disclosure rules that were put into place. Although 2021 was a good year, could we have seen more special activity? As already mentioned, there has been a change in fiscal policies, an increase in interest rates, and a shift in asset allocation, moving away from equities and more into fixed income. It will be very interesting in the specials space following the shift in asset class, and in 2022 we may very well see more demand in corporate bonds than equities. Finally, from a volatility perspective, we saw record sales last year, so it’s very much around liquidity management and making sure that the trading desks are focused on this to ensure a timely settlement. We have algorithms in place as I am sure other agents do to manage this process.

Sunil Daswani, Standard Chartered: From the perspective of Standard Chartered, our model is slightly different to some of our peers. Therefore, we do sometimes see different opportunities. At this point in time, the opportunity is like what we’ve always said: it’s looking at credit and duration risk. And we’re certainly seeing in the US Treasury market that great opportunity can be achieved from the lending of US treasuries of clients looking to take on lower forms of collateral, equity collateral, and also lending on a term basis. This takes education. It’s something that we are very proud of - what we’ve done as an industry over the last few decades, and coming out of the global financial crisis - to ensure that if you’re asking clients to take on risk, they understand that that risk comes with a reward, but it’s a risk that they’re aware of. The other thing that we see in our model, which is slightly different - and we do look and focus very much on the specials activity, which is where the industry is going – are in particular premiums in auctions of exclusives in the right markets, particularly in emerging markets, or emerging developed markets like Taiwan and Korea. What’s quite interesting when we’ve seen these premiums of recent clients is that they are making a lot more than what they would do if they were in an open discretionary programme. Finally I’m hoping at this roundtable that we’ll see that the traditional model of securities lending is forever evolving. We’ve talked about this a lot. But we’re actually now trading in this way for certain clients

Zorawar Singh, Deutsche Bank: 2020 was a catalyst for me. COVID was a period of volatility. Liquidity was a top priority for a lot of clients and this, in effect, opened some clients’ eyes to what it can be used for – securities lending, but more so in the fixed income space. I don’t think you’d see a lot of equity lenders come out and say: ‘I am taking the cash collateral back’. But to us, it doesn’t matter, right? I mean, we do our day job, we’ve got desks that cover all aspects. So as far as cash is concerned, it’s down to process, and to optimising how you manage that cash.

Ernst Dolce, AXA IM: On the beneficial owner side, we saw a couple of things. In 2020/21, the discussion with clients shifted from monetising their assets to also removing the liquidity trap that we have seen on their balance sheets. For the collateral, the European market is mainly non-cash collateral which is the opposite of the US (eg Europe: 80% non-cash collateral and 20% cash collateral versus US 20% non-cash collateral and 80% cash collateral). So currently, the focus is more on the cash because there is no pickup in the market negative interest rate environment, and you need to monetise the cash. When increasing the cash under the securities lending format, you can reduce the cost of cash sitting on your balance sheet, as this is expensive and the fund gets charged by the custodian. We have clients looking for a solution where they don’t see securities lending as just one pillar - lending the assets - but how they can reuse the assets across all their activities to make money or reduce their costs. I would leverage the point about US Treasuries. At the end of last year, mid-last year, there were a lot of opportunities between pair trades like GBP and USD with some good pick-up yield in the market. I think that we will continue to see this type of transition. When it comes to the collateral switch that you mentioned, we made more money in corporate than in equity last year. Corporate bonds have been good in terms of yield. I think that will continue.

Opportunities will be more on the corporate side. When it comes to equity, if the volatility continues to be above 20 and up to 25, like we saw at the beginning of the year, there will be opportunity there.

For UCITS funds, you can’t go and block those assets. But on the balance sheets of insurance or pension funds they have to deal with a set of regulations that is eating their assets. There is also competition for the same available assets. So if you have a government bond, you need to think:
• are you posting it for clearing under a CCP?
• are you using it for long box for UMR?
• can you make money with it via securities lending?
• or use it for funding to source via the repo?

So clearly, the conversation that we’re having with clients is: ‘What is the cheapest asset on my balance sheet to use as collateral that has no value? and ‘With the assets that have value, how I can make money?’.

This article is part of the Beneficial Owners Guide 2022, which is available here. 

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