Rising interest rates, search for yield to push securities lending in 2018

Asset owners, insurance companies and brokerages show renewed interest in securities lending

INTEREST in securities lending, which had declined dramatically following the global financial crisis, began to recover in 2017 and is expected to intensify among global investors, including Asia-Pacific institutional investors, in 2018.

Securities lending refers to the lending of securities or stocks by one institution to another. The borrowing institution provides collateral in the form of cash or non-cash securities. Non-cash refers to equities, government bonds, convertible bonds, corporate bonds, and other products. Securities lending is integral to short selling and can be used as a tool for liability management.

Global securities lending activity declined by approximately 30% in terms of assets on loan from US$3.4 trillion as of June 2008 to US$2.2 trillion in June 2017, according to data from State Street.

However, renewed interest in securities lending coming from assets owners, insurance companies and brokerages in Asia-Pacific, and asset managers mainly in the US, has resulted in a 13% growth in lendable assets from US$15.5 trillion in mid-2016 to $17.5 in mid-2017.

On-loan balances have also grown by 8% from US$1.9 trillion to US$2.1 trillion during the same period. Fixed income assets have grown by 21% from US$0.9 trillion to $1.1 trillion, while equity assets have declined by 4% from US$0.99 trillion to US$0.95 trillion.

The renewed interest in securities lending is driven primarily by a combination of the continuing low-yield environment which is pushing institutional investors to generate more return from their portfolios; efforts at reducing cost particularly in terms of trading fees; and a new regulatory environment that is driving the need for increased efficiency in the clearing and margining of transactions.

“These themes are consistent across the world. In Asia, this is true among insurance companies and asset owners. We’re also seeing it in Europe among asset owners and pension plans. In the US we’re seeing it among the large asset managers,” says Jansen Chua, head of securities finance, Asia-Pacific for State Street, one of the largest securities lending agents in Asia.

In addition to the traditional users of securities lending, quant fund managers are also contributing to the renewed interest in securities lending.

“The quant-algo space has certainly been a refreshing new source of demand, and that space has grown. They certainly had strong appetite for borrowing securities and demand is still very good in Asia-Pacific,” says Paul Solway, managing director and regional head of securities finance, Asia-Pacific for BNY Mellon.

Going forward in 2018, the growing interest in securities lending may be helped further by rising interest rates which are expected to particularly benefit institutions that run cash reinvestment programmes on the back of securities lending activities.

“The global macro environment seems to be improving and central banks are starting to look at increasing interest rates as the economies improve. But I think that trend to look for additional yield is not going away any time soon,” Chua says.

This is particularly true for insurance companies and pension funds which are finding it challenging to generate sufficient returns for financing their liabilities, following 10 years of very low interest rates, inflation in asset prices across all asset classes, and increasing longevity on the part of insurance and pension beneficiaries.

Because of these reasons, asset service providers have been focusing on approaching such institutions with a view to encouraging them to see the benefits of securities lending.

“Once they are interested we start working out with them how best to distribute their assets to create additional alpha,” Solway says.

 

This article is an abridged version of The Return of Securities Lending published in the February print edition of The Asset magazine. The full article is to be made available online on The Asset Plus. Please contact us for details on how to subscribe.