I was fortunate to have been asked to be the moderator for the opening panel at this year’s excellent ISLA Post-Trade Conference at the start of October. It was the tenth annual event and I thought it was a thought-provoking and informative day. Sejal Amin of ISLA has provided a great summary of the day’s discussions in the ISLA Blog, so I won’t repeat that here, rather I wanted to provide some additional brief thoughts on two topics mentioned in that summary.
Securities lending revenues this year and going into 2020 with a looming US election, are under pressure and various commentators on the day provided their views on why that would be the case. One commentator framed the outlook as one driven more by big picture issues, suggesting that investment strategy has / will shift towards macro strategies rather than equity-oriented funds. I am sympathetic to that view and recall that 2016 had a similar feel (Brexit vote and US elections). Nevertheless, I was also a moderator at an IMN Conference in September where I raised a similar question to a long/short manager. He was enthusiastic about the potential for next year and recalled a very successful 2016 for his investors. Opposing views are what makes a market so perhaps I shouldn’t be surprised.
Irrespective of whether securities lending revenues are increasing or decreasing, from an institutional investor’s perspective, the question is how they can capture as much of that revenue pie as possible without taking on risk outside their comfort zone. At Pierpoint we believe that there are always opportunities to improve returns on a risk-adjusted basis and despite the fledgling nature of our consultancy, we are bringing to bear our in-depth industry experience, working with clients to help them understand the revenue pick-up potential and develop a path to improved returns.
The second issue I’d like to visit here is the innovation and creativity angle. ISLA took a novel approach to the final session with the panelists being the moderators from the day’s earlier sessions, so I made an appearance there as well. I shared my strong conviction that structural securities lending change and innovation is typically forced onto market participants, usually in reaction to regulatory initiatives. SFTR and CSDR are excellent examples of how the industry will change and adapt to the requirements and implications of both these regulations. There will be an opportunity for participants to innovate and use the regulatory changes to their business advantage.
More immediately, innovation is relative at the firm level - each can improve their current activity. New markets, collateral, transaction structures, distribution paths and locations, all can produce innovation and opportunity for individual participants. From major changes through to small tweaks, alterations to a lending programme by a beneficial owner and/or their lending agent, can have an important impact on the value securities lending can bring to a programme. What we see is that firms of all types are resource-challenged, often staffed only to cope with the prevailing market environment with no excess capacity to explore business improvement. That’s where we can help identify and assess opportunities, develop implementation pathways, and help obtain necessary approvals.
Most firms have finalised their 2020 budgets or soon will. The question is, are those budgets hoping for a 2020 that is on the optimistic side (as the long/short manager I referred to earlier), or are they planning for improved returns irrespective of market factors beyond their control?
Roy Zimmerhansl
Practice Lead