Securities Lending Takes Centre Stage

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Byline: Brian Bollen

The National Bank of Kazakhstan's recent appointment of JP Morgan Chase as its non-custodial securities lending agent sent something of a frisson through the securities services market.While the move can be interpreted as a modest signpost along the path towards at least two necessary trends in securities lending - the expansion of existing programmes and the opening of new markets - it almost inevitably provokes a negative knee-jerk reaction.

With due respect to that institution, one is tempted to paraphrase Groucho Marx's famous observation and ask if anyone wants to be a member of the securities lending club when that club has admitted the National Bank of Kazakhstan to its membership list?

The answer is a resounding yes. The reality is that while other parts of international banking struggle to convince themselves that they have turned the corner, confidence in the short, medium and long-term future for securities lending is not in short supply, according to some global custodians.

New lenders are emerging to take advantage of the remuneration on offer, and the range of instruments continues to expand away from the traditional emphasis on ultra-safe, low-yielding US Treasuries.

Richard Warne, senior vice-president for investor services at JP Morgan Chase Bank, says any investment manager who has not at least considered the merits of securities lending is in dereliction of duty. "The more difficult it becomes to beat an investment benchmark, the more important it becomes to add value by other means. The incremental revenue from a properly structured lending programme can move a manager into the next quartile," he says.

Ed O'Brien, executive vice-president and head of State Street's securities finance business, says: "The last two years have been the best for new business. Thus far, 2003 is shaping up to be much the same as 2002, and not just in what you might call the traditional markets.

"We have seen a notable pick-up in activity in Canada, and, in selected markets in central Europe, we continue to be buoyed by the prospects of first-time lenders coming out of Asia Pacific. Moreover, the degree to which people are trying to finance or lend inventories would have been unthinkable just a few years ago.

"Securities lending has progressed in previously unimaginable leaps and bounds over the past decade. Our own experience indicates that there is undoubtedly more to come, as investors and fund managers who are familiar with the strategy become more comfortable and ambitious, and others learn about the range of possibilities that it opens up."

In this view, the growing global consensus on capital markets' main role in economic growth and the increased recognition by policy-makers and central banks that they need to stimulate securities lending - especially repo markets - promises to make securities lending a central element in the growth of 21st century capital markets.

Growth is inextricably linked to the continued development of capital markets. Their relative underdevelopment in continental Europe and in much of Asia, ex-Japan, particularly for equities, makes prospects even brighter. Almost paradoxically, their backwardness defines them as the new frontier for securities lenders. Concerns about the role that securities lending plays in the short-selling of stock are widely regarded within the industry as grossly exaggerated.

The potential for growth is underlined by the results of the fifth semi-annual survey of the European repo market, undertaken by the International Securities Marketing Association (Isma). …