The securities lending and financing industry had a challenging year with the significant impact of the Covid-19 crisis on trading activities. Here we review 2020 and assess the outlook for 2021 with CACEIS’ experts.
2020 was a challenging year for the world and the securities lending industry. As European economies started to tremble at the beginning of the crisis, some excellent opportunities arose on the market given the high level of volatility.
Although many clients were very concerned by the situation, there was no accompanying panic and most of them stuck to their lending programmes throughout the crisis period. This level-headed reaction helped avoid a liquidity crisis in the market by making securities available.
During the peak of the crisis, “The financing activities performed well as demand increased, driven by institutional clients’ fears of a liquidity shortfall. Demand for borrowing high-grade collateral also rose, and so became increasingly expensive, even for General Collateral liquid securities. The main reason was the need to collateralise derivative positions”, explains Dan Copin, Group Head for Securities Finance and Repo at CACEIS.
Central banks played a key role providing a rapid, coordinated and wide-ranging response to the events. The economic strategies they employed efficiently absorbed the financial shock and spreads quickly returned to normal levels.
Nevertheless, the speedy recovery to normality on the markets saw opportunities in special situations, such as M&A, disappear due to companies’ continued uncertainty and the excess liquidity in the market. The measures taken by central banks were necessary to avoid a liquidity crisis but markets lost momentum and became rather static.
“During the turbulent period, we drastically improved our communication with clients to reassure them. Many of them were concerned that they may have to perform large-scale sell-offs of positions, and with flashbacks to 2008, not have securities on loan returned to them. We have supported a broad array of client types through our securities lending and financing programme, including collective investment funds, hedge funds, pension and insurance funds and central banks”, says Donia Rouigueb, Head of Sales – Securities Finance and Repo at CACEIS.
Moreover, CACEIS Securities lending and financing teams had to manage the migration of major client programmes in the springtime during lockdown and in the autumn with the onboarding of clients from former KAS Bank, which became a 100%-owned CACEIS subsidiary on 1st November.
Industry players, providers and clients, were quick to adapt their working methods to the crisis, implementing an agile strategy with teams spread across various sites. The complex infrastructure of dealing rooms was rapidly delocalised, leveraging technology and networks to permit smart working, even for traders. “Fortunately, today’s technology permits such an operation, as this would have been much more difficult in 2008. Whether remote working continues remains to be seen, as it doesn’t seem to be part of the trading room mentality. Nevertheless, the exceptional situation showed it’s possible and that our business continuity plans are solid, without disruption”, says Dan Copin.
At the end of 2020, the situation is now back to normal for players with overall less lending revenues compared to 2019 due to very quiet markets and a big excess of liquidity driven by central banks. Players with both securities lending and financing activities should see revenues balance out. Fixed income levels are very low, with risk premiums all but disappearing.
2021, a brighter outlook for the activity but a lot of challenges too
Making predictions for 2021 is hard because so much has changed and the environment is still very much uncertain.
With the help of the Central Banks and the action of the governments, the recovery seems to be quicker than expected and we will soon see the return of some M&A driven by the necessity for the companies to consolidate after a rough period for the business. This consolidation movement will be good news for the securities lending programs as it will lead to Special Situations opportunities.
In the meantime, “Fixed income spreads will probably remain low as they’re so closely linked to central banks and high quality liquid assets (HQLAs), so we will probably see spreads continue to reduce in 2021”, says Dan Copin.
One thing for sure is that Securities lending revenues remain a very good opportunity for investors looking for a safe way to extract some basis points performance. CACEIS’ tailor-made solutions will be a winning approach for the clients as they will help them define the optimal lending strategy and generate extra-revenues.
Regulation: towards further transparency
Regulations and compliance will be the hot topics for the coming year.
The Securities Financing Transaction Regulation - SFTR - was implemented last July in order to enforce greater transparency in securities financing transactions. It imposes major reporting commitments and, even when the lending agent is able to carry a major share of this burden, the clients will need to be very much involved to monitor the quality of reporting.
The buy-in and settlement discipline elements of the Central Securities Depository Regulation – CSDR, with its heavy reporting burden, will also have important implications, particularly for bond lending which is historically less efficient in term of settlement fails. Happily, it has been pushed back until 2022.
ESG will definitely be the hotter topic in 2021, knowing that the world is looking for a way to transition to a more sustainable economy. Securities lending can be ESG compliant but there are more discussions to take place and processes to put in place in order to reassure the investors about it. For the investor, the priority is typically around voting and meeting attendance. As a lending agent, it will be necessary to continue developing powerful tools to recall stocks across the many different countries in which our clients have lending activity – recognising that jurisdictions apply different rules regarding how stock is voted and how a loan transaction is structured legally.
“We are quite confident that, as always, our OTC industry will find a way out of these challenging times by continually innovating, using financial ingenuity to uncover new sources of revenue growth just like in the post-2008 period, where we saw the rise of the securities financing business”, states Dan Copin.
“Finally, a key aspect of our business has always been and will remain maintaining a close dialogue with clients to understand their needs, design appropriate products and deliver tailor-made solutions. Although trading is becoming ever more automated, the human element remains essential to the relationship side of the business, working together to find solutions for the future”, concludes Donia Rouigueb.
CACEIS’ securities lending offer has been highly successful thanks to its flexibility and the quality of support for clients, as well as to growing interest from institutional investors. This proximity to clients and the quality of services provided over the last four years has been recognised by the market, taking three of the most prestigious awards at the Global Investor ISF 2020 Awards last October. These results are a reflection of the excellent image of CACEIS in this domain.
CACEIS has consolidated its position as a trusted partner that enables its clients to access the securities lending market on the best possible terms, thanks to its flexibility and the quality of its client support.