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Feature

ISLA Post Trade panel strikes optimistic tone for 2021


30 March 2021

The discussion, held remotely, touched on promising new markets, post-pandemic recoveries, ESG and the role securities lending is playing in both novel and legacy asset manager portfolios

Image: Olga/adobe.stock.com
The International Â鶹´«Ă˝ Lending Association’s (ISLA) 11th Post Trade Conference took place on 16 March and, as with so much else in the current climate, it was a virtual affair.

This year’s two-day event featured a panel discussion titled Key Business, Trading & Product Drivers Impacting Our Markets, which delved into how, in these exceptional times, key regulatory, economic and political drivers are influencing trading decisions and business development priorities.

Three panellists — one representing a global investment manager, one the global head of securities lending at a major bank and the last the head of EMEA securities lending at a banking multinational — joined ISLA CEO Andrew Dyson to take stock of the past year and comparing the motions of the pandemic era markets to where we find ourselves three months into 2021.

One panellist started off on a high note. “The positive resilience shown by the securities lending industry deserves a shout out,” and despite the storm of March and April last year, “from our perspective, our volumes were up to more than double to the month of March”.

Leading on from that, “we’ve seen client and investment behaviour change substantially,” they said. There’s been a search for yield, some markets have recovered quicker than others and many portfolios have switched to emerging markets. “We’ve seen a trend towards a heavier emerging markets lean from a securities lending perspective,” he added.

As we move further into the year, they said corporate activity has been “very positive” and revenues have been up for beneficial owners. New markets and new opportunities represent “new frontiers” — in Middle Eastern markets and Asia Pacific, investments have seen an increase.

Ultimately, as investments have moved forward and transitioned into these new markets, securities lending has continued to be a “big focus” as regulators and local market exchanges have been “very open and very positive” with respect to securities lending.

The first panellist said that as an asset owner and asset manager, they were able to see market dynamics “through two very distinct lenses”. On the asset manager side, despite an “interesting year”, one of the “positive behaviours” coming to the fore was “a new generation of fund managers” that use securities lending as a portfolio management tool to enhance customer outcomes.

There is a “new breed” of asset managers, they said, who are launching new portfolios that consider securities lending “from the get go” and see it as a “very powerful option”, asking themselves what does the lending framework look like from day one?

And then there’s legacy portfolios, which in the past may not have engaged with securities lending, but, they added, are now “carefully reconsidering” it in order to enhance their customer outcomes. All of this is “very exciting,” they said.

Continuing the optimism, they said that “if you compare broader markets in 2021 to 2020, notwithstanding the volatility of March and April, markets feel optimistic, less fragile and have more substance”.

The third panellist concurred with this sunny optimism, framing it as a “global view” and commenting that these “positive sentiments” are coming through largely on the long-side of portfolios rather than the short-side.

They went on to say that although Europe has had a challenging start to the year, it’s “nothing compared to March and April 2020”. Other reasons to be cheerful include plenty of corporate activity taking place, plenty of corporate restructuring, dividends are being paid again and appetite for investment is high.

On which region of the world has done the best over the past 12 months and looks set to capitalise on that success, one panellist was unequivocal; the US. “The SPAC phenomenon has been really helpful” in that regard, they said.

Two panelists specifically highlighted China as a market with great potential in the medium term.

“Asia has really been an area of growth with China opening up,” one panelist said.

On the subject of new frontiers, another speaker noted that, “looking internally”, their firm is “very much in favour” of the broader role securities lending can play in market liquidity and price discovery.

Looking forward, there are two “key themes that will form the heart of our agenda in 2021,” they said. The first is the role of securities lending in supporting broader Environmental, Social, and Corporate Governance (ESG) growth. The second, “how we can promote diversity and inclusion, both at industry and the business level”.

Capitalising on that segue, Dyson asked the panel just how important the ESG agenda really is. In response, one panellist said that, ultimately, in the context of changing portfolio dynamics, “there is a general acknowledgment that our investment behaviours have a positive or negative impact on the world,” and you would therefore expect investment behaviour to change.

On just what ESG means to investors, they said that on an environmental basis, “we have a clear lens what ESG means, there’s a lot of synergy”, and to a lesser extent it’s the same for the social aspects of investments.

But in terms of governance, “it means different things for different people”. Asset owners in different regions will consider what is socially acceptable and what constitutes governance standards in different ways, he added.

As securities lending is a “big part of the governance conversation”, it is incumbent on managers and asset owners to ensure they are optimising performance and capturing opportunities.

“There is a need for an industry review, for a baseline or some kind of consistency for ESG,” they noted. “From our perspective, we’re very keen to ensure all investment habits align with ESG,” and with its impacts on reporting, collateral behaviours, investment habits, it’s important to “have the tools in place”.

Another speaker echoed many of the ESG sentiments, stating that ESG is “front and centre” at their firm. “It’s the buzzword that’s out there at the moment,” and conversations with supply-side feature it predominantly.

“There is a significant need for transparency,” they mused. “Given this phenomenon is here to stay,” and people will always have a desire to do more with their assets, and securities lending can coexist with that desire, “you need to know what liquidity you are taking down and what the stability of that liquidity is going to be like”.

They concluded that once we have that much-needed transparency, “it’s simply a pricing conversation, and I don’t think it’s a huge leap to get that incremental transparency that we need”.
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