By Paul Collard
There are many indications in the market that some securities lending agents are telling their clients to “hang in there”.
“Low demand.” “Plentiful supply.” “Lean spreads.” “Few specials.” “High cost of collateral.” “Impending regulation.”
In today’s market, many indications such as low demand, plentiful supply, lean spreads, few specials, high cost of collateral, and impending regulation have some securities lending agents telling their clients to “hang in there.”
If you listen to some in the market, then you would be forgiven for thinking that the securities lending market is suffering from what could be a terminal malaise. “Hang in there?” Is that a course of action?
There are most certainly plenty of challenges, and lending agents have to be better. They have to be smarter, faster, and more nimble. They have got to be able to react and adapt, and for many, that is not easy. Legacy issues can be a considerable burden. Lending programs can be like shipping tankers; great behemoths that take miles to make even a small correction to their course. In this challenging environment, you need to be able to move quickly and adapt faster.
While this environment is most certainly challenging, nothing about this current lending market is new or unexpected. As lending agents, we have faced similar issues before (often many times over as the market cycle goes around and around). Two things have always set some agents apart. Innovation and technology. If we now add in the use of data, then we have found three routes to success.
Technology is going to be one of the key differentiating factors throughout 2020 and beyond. It needs to be flexible enough to cope with changing demands from both borrowers and lenders while being robust enough to maintain the highest standards of compliance and to be able to embed a wide range of often bespoke ESG and other client specific criteria into a global lending program. In 2020, the market will be looking for an even higher level of efficiency and this will inevitably be led by new technology. Some lending is already becoming automated. From daily short covering to automatic returns and recalls, many standard lending processes can be moved onto a platform. This trend will only increase. Lenders have to be ready for this and have systems that can keep up. Technology will enable a business to be a success.
Innovation challenges lenders. Some lending models are simple. Lend assets. Receive high quality collateral. Get paid a fee. That has been the securities lending model since the market first started. But now it is past its sell-by date and clients deserve better. Borrowers need more. It is time to look at the way securities are lent and borrowed, and find solutions that offer greater flexibility and control to everyone involved in the lending cycle. This can require new documentation. Pledged collateral could become the standard in the market, while an agent ISDA that will allow greater access to the world of Total Return Swaps will probably follow. Lenders have to evolve and innovate their lending products to keep up with the market’s constantly changing demand.
Then we have data. If technology enables and innovations create, then data is the differentiator. We all consume data. But do we use it efficiently? It is too simple to try to use data as a benchmark for performance. Data can be much more than a tool for comparison. Embedding data in the heart of a trading system offers more, but that is still just the first of the many benefits of successfully integrating the right data into the workings of a lending model. Used correctly and in the right system, then data can be the key to taking a lending programme into the new decade.
With the right mind-set and the right foundations, there is plenty to be positive about. There can be no doubt that there are many challenges ahead, but we also see plenty of new opportunities as counterparts react and change to the new environment. One thing is certain in 2020. Things will change.
The reality is that things are never as bad as some would have you believe. But one thing is undoubtedly true. Lending agents and by default, clients who are not moving their programs forward are going to be left behind. So the next time you question your lending agent about why revenues are down, don’t accept the answer “just hang in there”!