Beneficial Owner Trends – Where next? 

The 2023 EU Beneficial Owners’ Roundtable was moderated by Andy Dyson, the Chief Executive of ISLA with EquiLend as the lead sponsor. The roundtable was held in late March with a panel of industry experts discussing topics from the data, ESG, collateral and the change from 2022 to 2023.

A portion of the 2023 EU Beneficial Owners Roundtable is available in the video above. See below for a transcript of the highlights. 

Andy Dyson, Chief Executive Officer, ISLA: So how much of a particular asset do we have in a collateral pool? How many days would it take to sell it? What could be that price movement over those days? So, in addition to sort of haircuts, people looking at almost liquidity stress buffers, etc. On collateral, where are you guys seeing in terms of what your clients are asking you more generally?

Stephen Kiely, Head of the BNY Mellon Securities Finance Client Relationship Management and Business Development Teams in EMEA: I think a positive trend in terms of the questions we’re asked by clients is, they are starting to be more concerned with liquidity and credit. I think that’s absolutely the right way to go. The only true value of whether something is liquid or not, is: is it being bought and sold? And so we’re seeing clients put greater emphasis on the liquidity of their collateral and not too concerned about whether it’s single or double A.

Olivier Zemb, Head of Equity Finance and Collateral Trading, Caceis Bank: We have to bear in mind that in terms of risk, collateral has to be seen as secondary or derivative. The primary risk is counter-party risk. Collateral is certainly key but you need to check what you are receiving from which counterpart and then you can adapt your collateral profile and haircuts. Right now, haircuts are pretty much standard but this is an area where we need to be flexible.

Ernst Dolce, CEO & Co-Founder, Biben Capital Markets: I’ve observed a shift in the buy-side’s approach to pricing collateral, as they are now considering not only risk and diversification, but also the potential uses for the assets. For instance, some firms are looking to reuse the collateral for intra-group trades. While some firms previously avoided such transactions, they are now recognising the value of the assets they receive as collateral and seeking to leverage them.

Other firms are focused on finding the most cost-effective way to deliver the collateral, which involves comparing the value of different assets, such as government bonds and credit, for various types of transactions like derivatives, repos, securities lending, and collateral. However, implementing these strategies is challenging and requires building new pricing models.

Cassie Jones, Managing Director, EMEA Head of Financing Solutions Client Management, State Street: The buy-side need to consider their specific funding and opportunity cost, so that’s where it takes a step up from just general triparty optimisation to asset optimisation.

If you can have a view of your entire inventory as the buy-side, and you can actually identify when securities are trading special, for example, you don’t want to tie that up as collateral in a repo trade. You want to lend that on the market. But having just a more real time view of your inventory sources and uses of collateral goes a long way.

Andy Dyson: ESG, does that change the client’s dynamic? Cassie Jones: We just have to find the balance. There is a cost and benefit trade-off of limiting your collateral schedules so that it reflects your ESG parameters, but then you’ll never get anything out on loan. So there’s that trade off.

Nick Davis, Executive Director, EMEA Head of Relationship Management, J.P. Morgan: Collateral is secondary. When clients are looking to restrict asset classes due to their own ESG mandate, it is on the lendable and not necessarily on the collateral.

Maurice Leo, Client Solutions, Agency Securities Lending, Deutsche Bank: A slightly different angle on collateral: HQLA. So if you think the other angle is there is a lot of money moving out of deposits at the moment in Europe because interest rates are rising and in the US because of concerns with bank risk. So you’re seeing that money move. I think that money is not going to be transitory. Some of its going to stay there because of the interest rate environment.

I think you’ve also got a lot of government agency money parked at the ECB which has been parked there on favourable terms for a long time. The ECB is anxious that that money gradually and orderly moves off balance sheet, that’s all going to flood into money markets, into repo, into the products that we all operate in and arguably a lot of it is conservative and is going to gravitate towards government collateral.

So government collateral is likely to become more expensive as you see more of that money coming in. So for those clients that probably ringfence and depend heavily on that, that’s going to be a difficulty. If you’re lending it , I think potentially you’re going to see enhanced spreads.