In these risk-averse times, JPMorgan’s Stewart Cowan says a notable development has been what he calls “securities lending lite”, where clients decide they no longer want to actively lend into every opportunity, but will only lend into ‘specials’. These selective lenders tend to prefer releasing stock into arbitrage opportunities, Cowan says, for example where borrowers might seek to profit from divergence in the price of BHP Billiton shares between the Sydney and London stock exchanges. For Cowan, such a return-crimping attitude from clients is still fair play, because securities lending should be considered “an alpha source that’s totally unrelated to the performance of the market” but nevertheless needs to be implemented with a consideration for risk appetite, just like any other investment decision made by a fund. (As an aside, he says that the returns generated by funds that lend their fixed income assets were healthy in 2009, given demand for those securities was so strong.)
Indeed, ASLA’s Peter Martin says lenders are keener than ever to tailor all sorts of risks in their programs, from limiting the percentage of assets or total net asset value of stock on loan at any one time, insisting their reinvested collateral be in a separately managed account rather than pooled with that of other lenders, or stipulating a particular level of counterparty creditworthiness – a common request in light of the collapse of Lehman Brothers, once a major prime broker and player in securities lending. JPMorgan’s Cowan says some clients have started to “relax” a little in terms of the collateral they will accept from borrowers, with governmentguaranteed bank debt issues, for example, now once again passing muster as well as cash.
Cowan does not think the new reporting regime for short-selling will inhibit the practice. The draft regulations require lending agents such as custodians to report covered short-selling transactions to market operators, while from April 1 this year, short sellers must report all of their short positions to ASIC (for aggregation and release to the public four days later). From the custodians’ point of view, Cowan says the systems are already in place to “tag” short trades, stemming from the days when such trades were afforded different treatment under State-based stamp duty regulations. With the shorting ban becoming just a bad memory, ASLA’s Martin strikes an optimistic note for securities lending in 2010. “We hope to see an increased allocation in 2010 to the Australian strategies of some of the large hedge funds that may still be sitting on the sidelines, long cash,” he says, while also predicting a big comeback for the ‘specials’ which enhance securities lending returns so much. “Over $90 billion was raised by ASX-listed companies in 2009 so one would expect a significant amount of M&A activity in 2010, as companies seek opportunities to rebuild and grow.”
