In the first half of 2020, far-reaching macroeconomic and market repercussions in the wake of Covid-19 have had an inevitable dampening effect on securities lending globally. In short, a combination of unprecedented market turbulence and short-selling bans resulted in muted borrower appetite and, ultimately, led to a slowing of revenues around the world, including across Asia-Pacific.
This has been a blow to expectations at the start of 2020 that it would be a strong growth year for lending, both in revenue and volume. The previous 12 months were mixed, as political and economic headwinds led by Brexit and international trade tensions battled with a sense of optimism.
For the first half of 2020, Asia’s equity lending revenues of US$798 million were subdued compared with prior years. The decline is largely attributed to Japan, the largest market, declining 24% compared to the same period last year, along with a short-sell ban in South Korea which limited lending revenue. Australian equity revenues also demonstrated similar trends with a 29% year-on-year decline to US$44 million.
Despite this, opportunities are emerging as far as securities lending goes in the Asia-Pacific.
The region is expected to see a resumption of business and economic activity more quickly than elsewhere in the world, spurred by China’s GDP growth of 3.2% in the second quarter of 2020 compared with the same period a year ago, and rebounding from the -6.8% in the first quarter amid the lockdown. This provides confidence for investors, who had suspended lending programmes, to potentially resume activity quicker.
The outcome of a survey conducted by EY on behalf of the Pan Asia Securities Lending Association (PASLA) revealed that ESG (Environmental, Social, and Governance) has become a key consideration in APAC securities lending practices, although investment in ESG and its incorporation into programmes is still catching up with the importance that participants place upon it.
The key areas of interplay relating to ESG and securities lending comprise of:
- Ensuring investors are able to exercise their right to vote and influence the direction of companies in which they own a stake while optimizing their lending revenue;
- Considering the approach to assets held as collateral to allow as much flexibility as possible when defining equity collateral restrictions while maintaining a robust and programme-wide lens; and
- Considering any ESG-related restrictions to counterparties in a securities lending programme, whether they be borrowers or cash reinvestment counterparties.
In response to the need for more expertise and focus on ESG in lending programmes, PASLA is planning to coordinate the creation of standardized ESG principles within Asia-Pacific. This will build on the work of the International Securities Lending Associations Council for Sustainable Finance, which is crafting a set of principles for sustainable securities lending to promote global harmonization of ESG standards.
Based on constraints on traditional securities lending in the wake of Covid-19, compounded by already-low yields and cost burdens for asset owners and investment managers alike, the value of making greater use of under-utilized assets has become ever clearer. In short, this creates opportunities for a broader securities finance offering that integrates differentiated solutions to help global institutions leverage embedded synergies and derive unrealized alpha.
Ultimately, faced with growing cost pressures and the challenge of generating returns in a lower-for-longer rates environment, asset owners and investment managers cannot ignore the difference that securities lending can make in terms of enhancing portfolio performance and offsetting costs, while also supporting liquidity.
In continuing to deal with the reverberations of Covid-19 over the coming months, markets are cautiously optimistic that the securities lending business will stay resilient and adapt to remain relevant in the “new normal” landscape for investments today.
Mark Snowdon is head of capital markets for Asia-Pacific at Northern Trust