Stepping stones to sustainable lending
27 September 2022
Sunil Daswani, global head of securities lending at Standard Chartered, provides a step-by-step guide for beneficial owners to drive a successful securities lending programme
Image: stock.adobe.com/Benjamas
As the new school year starts, with squeaky shoes and pristine stationery, the leaves fall and we look to the season ahead. Now is a good time for beneficial owners to think about how best to approach their securities lending activities.
Increasingly, securities lending is seen not as an isolated activity, but an integral part of a wider liquidity management strategy, ultimately driving better outcomes for the business. This applies not only to the largest players for whom securities lending or borrowing is a major part of their core business, but also smaller firms where this is occasional or opportunistic.
But what drives a successful securities lending programme? This article provides five pointers.
1. Make better use of technology
Evolving technology and better use of data is helping to drive greater transparency, better price discovery, more confident decision-making, and improved process efficiency. By leveraging their own technology and their agency securities lending provider鈥檚 technology more effectively, beneficial owners can spend more time with their provider on more strategic discussions such as risk, collateral and, increasingly, how best to connect securities lending into their wider environmental, social and governance (ESG) ambitions.
2. Connect ESG into your securities lending strategy
Many firms have set challenging ESG targets to meet stakeholder expectations, meet regulatory requirements, and to be better corporate citizens. Integrating these ambitions within a securities lending programme brings its challenges. Every beneficial owner has their own ESG priorities, so they need a tailored securities lending programme that meets their asset, collateral and counterparty criteria, and enables proxy voting in line with these criteria.
The reduction in supply of certain securities linked to ESG matters can lead to increased borrower demand and increased revenue for lenders of these securities. However, these returns can be eroded if assets are withdrawn for long periods for proxy voting. To avoid this, beneficial owners need their provider to take a data-driven approach to identifying and withdrawing securities from lending programmes very precisely, minimising lost lending income.
3. Review your collateral
Beneficial owners that are integrating ESG policies into securities lending will review their collateral as part of this process, but all beneficial owners should do so, even if ESG is not yet a key part of their lending strategies. Monetary funding introduced to support economies during the pandemic is coming to an end, while inflation and rising interest rates will further reduce liquidity. Lenders should take an integrated view of collateral across their activities as far as possible, including OTC derivatives and repo, as well as securities lending, maximising flexibility, opportunity and, potentially, returns.
4. Review your risks
All market participants should be prioritising risk management and liquidity in a more constrained market environment. For beneficial owners, this includes reassessing their lending (as well as collateral) parameters and counterparty risks to balance risk, return and ESG credentials. They may also consider their indemnification. Some will conclude that balance sheet, or in some cases insurance-backed, indemnification is essential, while others may see this as an avoidable cost.
5. Find the right partner
The right agency lender is essential to navigate the complexities of a market characterised by constrained liquidity, inflationary pressures, rising interest rates and an increased focus on social and environmental purposes, as well as financial objectives. Many beneficial owners have focused their choice of provider solely on revenue projection and fee splits, but this approach fails to take into account the nuances of each owner鈥檚 financial and ESG strategies.
Instead, these institutions should be evaluating how providers can tailor programmes to meet their risk-reward objectives precisely, the efficiency of their operations, the use of data to drive enhanced reporting and decision-making, and the quality of client relationships and communications. Beneficial owners are also increasingly seeking to work with providers that demonstrate a strong commitment, and proven expertise, in bringing together money and purpose for a sustainable and financially attractive securities lending programme.
Increasingly, securities lending is seen not as an isolated activity, but an integral part of a wider liquidity management strategy, ultimately driving better outcomes for the business. This applies not only to the largest players for whom securities lending or borrowing is a major part of their core business, but also smaller firms where this is occasional or opportunistic.
But what drives a successful securities lending programme? This article provides five pointers.
1. Make better use of technology
Evolving technology and better use of data is helping to drive greater transparency, better price discovery, more confident decision-making, and improved process efficiency. By leveraging their own technology and their agency securities lending provider鈥檚 technology more effectively, beneficial owners can spend more time with their provider on more strategic discussions such as risk, collateral and, increasingly, how best to connect securities lending into their wider environmental, social and governance (ESG) ambitions.
2. Connect ESG into your securities lending strategy
Many firms have set challenging ESG targets to meet stakeholder expectations, meet regulatory requirements, and to be better corporate citizens. Integrating these ambitions within a securities lending programme brings its challenges. Every beneficial owner has their own ESG priorities, so they need a tailored securities lending programme that meets their asset, collateral and counterparty criteria, and enables proxy voting in line with these criteria.
The reduction in supply of certain securities linked to ESG matters can lead to increased borrower demand and increased revenue for lenders of these securities. However, these returns can be eroded if assets are withdrawn for long periods for proxy voting. To avoid this, beneficial owners need their provider to take a data-driven approach to identifying and withdrawing securities from lending programmes very precisely, minimising lost lending income.
3. Review your collateral
Beneficial owners that are integrating ESG policies into securities lending will review their collateral as part of this process, but all beneficial owners should do so, even if ESG is not yet a key part of their lending strategies. Monetary funding introduced to support economies during the pandemic is coming to an end, while inflation and rising interest rates will further reduce liquidity. Lenders should take an integrated view of collateral across their activities as far as possible, including OTC derivatives and repo, as well as securities lending, maximising flexibility, opportunity and, potentially, returns.
4. Review your risks
All market participants should be prioritising risk management and liquidity in a more constrained market environment. For beneficial owners, this includes reassessing their lending (as well as collateral) parameters and counterparty risks to balance risk, return and ESG credentials. They may also consider their indemnification. Some will conclude that balance sheet, or in some cases insurance-backed, indemnification is essential, while others may see this as an avoidable cost.
5. Find the right partner
The right agency lender is essential to navigate the complexities of a market characterised by constrained liquidity, inflationary pressures, rising interest rates and an increased focus on social and environmental purposes, as well as financial objectives. Many beneficial owners have focused their choice of provider solely on revenue projection and fee splits, but this approach fails to take into account the nuances of each owner鈥檚 financial and ESG strategies.
Instead, these institutions should be evaluating how providers can tailor programmes to meet their risk-reward objectives precisely, the efficiency of their operations, the use of data to drive enhanced reporting and decision-making, and the quality of client relationships and communications. Beneficial owners are also increasingly seeking to work with providers that demonstrate a strong commitment, and proven expertise, in bringing together money and purpose for a sustainable and financially attractive securities lending programme.
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