In the first half of 2020, far-reaching macro-economic and market repercussions in the wake of COVID-19 have had an inevitable dampening effect on securities lending globally. In short, a combination of unprecedented market turbulence and short-selling bans resulted in muted borrower appetite and, ultimately, led to a slowing of revenues in Asia Pacific (APAC) and around the world.
In response, the industry has had to adapt quickly to the dramatic volatility in equity and bond trading, as well as to uncertainty in regulations in certain geographies. Among the developments impacting the market as the pandemic has gathered momentum are:
- A combination of lower market valuations and temporary short-selling restrictions introduced by a number of countries have put lending plans for certain institutions on hold, and led to a small number of other firms suspending existing programmes in the short term; and
- The rising number of dividend cancellations by corporations, encouraged by governing bodies and regulators around the globe, will likely have a slightly negative impact on securities lending demand over coming months, especially where the borrowing demand may have been tied to a company’s dividend distribution.
However, the shake-up at the hands of COVID-19 hasn’t completely dented hopes for securities lending in APAC. Broadly, it remains a low-risk way to generate additional returns on the investments of asset owners and asset managers alike, via well-managed, risk-mitigated and transparent programmes.
Opportunities for securities lending are emerging in the region, evidenced by six key trends:
- Spurring a return to lending in line with investor confidence in the region overall;
- Providing new context for how to use lending for liquidity as well as returns;
- Driving initiatives to enhance data access and technological innovation;
- Determining ways to integrate ESG factors within APAC securities lending practices;
- Creating new prospects in terms of borrowers, geographies and collateral; and
- Offering greater potential to those lenders looking to optimise their assets.
Ultimately, faced with growing cost pressures and the challenge of generating returns in a lower-for-longer rates environment, asset owners and investment managers cannot ignore the difference that securities lending can make in terms of enhancing portfolio performance and offsetting costs, while also supporting liquidity.
In continuing to deal with the reverberations of COVID-19 over the coming months (at least), markets are cautiously optimistic that the securities lending business will stay resilient and adapt to remain relevant in the ‘new normal’ landscape for investments today.
Northern Trust Disclaimer: This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to expert, institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors.
