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A matter of process

There is much afoot within the international securities lending field as seen from the perspective of the institutional investor. The question I would liketo raise in this article is whether there are discernible trends within the industry propelling securities lending in a certain direction. In view of the restricted place, I can only touch on a few aspects of this question.

The financial world is trying to cope with a major global crisis. The problems in the Far East have deepened and have forced the Hong Kong Monetary Authority to intervene in the securities markets in a bid to ward off speculative at-tacks on its currency.

The Russian currency has collapsed amid increasing political uncertainty and the US and European markets are demonstrating that they are not immune from the fallout, to say nothing of re-cent South American developments.

Admittedly, this is not the most in-spiring setting for writing an article on the driving forces behind securities lending, but in reflection there is perhaps some common ground.

The need for control of primary processes.

The relevance of this issue struck me during a discussion I recently had with one of our major institutional clients. The treasurer of this fund touched on a number of developments within the pension fund that had led to a significant change in perception of the role of securities lending.

The outcome was a complete re-design of its securities lending operation, effectively moving securities lending from the back office to the front office.

This put securities lending traders, treasurers and repo traders effectively together on front office desks. This is thought to enhance existing portfolio income and enable the use of portfolio's to raise financing for other activities.

The effect of the re-design was an unbundling of securities lending from the traditional custody product, and the approximation of securities lending to more traditional forms of short term finance such as repo trading.

The interesting question was why this re-design had taken place. It was clear during the discussion that at least two factors were at play.

The first was an increased need to maximise the financial return of the investment portfolios by increasing securities lending volume and in consequence, the recognition of securities lending as a front office process.

The second was the need for in-creased control of the processes that lead to this maximisation.

This approach defines securities lending firmly as a tool of investment management in-stead of a means of cost reduction.

Some say this is a question of se-mantics. Does it really matter whether securities lending is seen as an income en-hancement and fi-nancing tool or is it viewed as a means of cost reduction?

I believe there is a clear difference be-tween both ap-proaches and I also believe that the sooner we recognise these shifts and the reasons be-hind them, the better position we will be in to add value to our institutional clients, by assisting them in achieving increased returns and financial functionality of investment portfolio's.

Granted, this takes a different view of securities lending from the perspective of a (custodian) bank that now acts as intermediary between supply and demand of securities.

The (custodian) bank will be required to take a more pro-active approach towards the institutional investor and will need to apply skills in the implementation of innovative securities lending strategies, to meet client expectations.

There is definitely a challenge to be met for those who have the vision to recognise the changes that are taking place.

Nicco Zwikker is with MeesPierson in Amsterdam

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