GM EDITORIAL 33.qxd:.
A CAUTIOUS COMEBACK FOR SECURITIES LENDING 62
9/4/09
15:20
Page 62
securities. Some lenders were forced to liquidate their reinvestment assets and crystallise those losses while others opted to sit on unrealised losses. All players, including the most sophisticated, have been impacted. For example, CalPERS, which had reaped almost $1.2bn from stock lending in the eight years to 2008, surprised the market with its unrealised loss of $509m in the first quarter of last year. Jean Robert Wilkin, executive director and head of GSF product management at Clearstream, says, “There was a high level of competition among securities lending providers to give clients what they wanted, which was enhanced returns. Non cash collateral was seen as being old fashioned and not as attractive but it has now become trendy again. Today, clients are more interested in optimising rather than maximising returns, which involves taking an integrated approach to both risk and return.” Keith Haberlin, head of securities lending business development for Europe & the Middle East at Brown Brothers Harriman (BBH) adds, “The goal of securities lending should be to generate incremental returns from the investment portfolio. We believe in focusing on the intrinsic value of the assets in the portfolio, rather than on the aggressive re-investment of cash collateral. Although counterparty risk has become a significant concern for the industry, the industry handling of the default of Lehman Brothers well as the unwinding of client loan positions was generally an orderly process. The bigger and more surprising issue has been that the cash collateral vehicles of many programmes were investing in assets such as unsecured Lehman paper, and many beneficial owners did not understand the potential risks of some of the higher yielding strategies.” While the cash re-investment certainly cast a pall over the industry, the short selling ban was equally damaging. The legislation imposed by regulators worldwide to stop the run on certain securities such as financial services stocks unleashed a torrent against the securities lending industry and its practices. Industry participants bristled at the criticism claiming there was a misperception of their
Jean Robert Wilkin, executive director and head of GSF product management at Clearstream, says, “There was a high level of competition among securities lending providers to give clients what they wanted, which was enhanced returns. Non cash collateral was seen as being old fashioned and not as attractive but it has now become trendy again. Today, clients are more interested in optimising rather than maximising returns, which involves taking an integrated approach to both risk and return.”
Wayne Burlingham, global head of securities lending at HSBC Securities Services (HSBC), says,“Demand is down significantly from last year and I would say that some lenders have suspended their programmes rather than completely pulling out. Programmes that take cash collateral tend to be the ones that can be in the biggest trouble, whereas programmes like ours—that take securities as collateral— potentially see clients return much quicker. Photograph kindly supplied by HSBC, April 2009.
business models. According to Oliver from Spitalfields, only a third of stock lending is employed for short selling. The remainder is used for a variety of reasons such as settlement, dividend reinvestment, providing liquidity, various trading strategies and the collateral needs of brokers. Paul Wilson, global head of client management & sales, securities lending, at JPMorgan Worldwide Securities Services, notes “While most regulators made it clear that the restrictions targeted short sellers and not securities lenders, some lenders felt there were perceived reputational issues. This has made the industry realise that it needs to do a better job of addressing lenders’ concerns and educating them about the benefits that securities lending brings to the markets in terms of the liquidity, depth and improved price discovery. Earlier this year, Chris Hitchen, chairman of the National Association of Pension Funds, called on pension funds to resurrect their stock lending programmes, saying the activity was crucial for efficient markets. The industry needs to make that message clear.” Graeme Perry, who is head of agency lending at BNP Paribas Securities Services, agrees, adding,“Everyone in the securities lending chain–custodians, prime brokers, asset managers etc—has suffered and beneficial owners are being much more inquisitive about what securities lending entails. The industry as a whole is making a much greater
M AY 2 0 0 9 • F T S E G L O B A L M A R K E T S