Beneficial owners are beginning to take a more holistic view when it comes to securities lending, rather than simply asking their agent lenders ‘What are my numbers at the end of the month in terms of earnings?’

Speaking at a closed-door round table discussion in New York in December, Christopher Benish, managing analyst at State of Wisconsin Investment Board, noted that the discussions surrounding lending from beneficial owners has “evolved”, and that the conversations have become “a much more integrated discussion across our internal staff”.

He said: “We don’t want to think of securities lending as this isolated, standalone silo that’s walled off from everybody else. We want it to be about, ‘What are we seeing in lending? How does that impact what we’re seeing in borrowing? Why are there differences? What strategies can we maybe employ or what arbitrage opportunities are out there that we could take advantage of? How do we best employ our balance sheet from a funding perspective, whether it’s funding leverage or arbitrage opportunities?’ Securities lending is one small piece of that discussion, and it’s becoming a much more integrated conversation, which has been a really interesting development.”

Looking at the developments from an agent lender perspective, Francesco Squillacioti, global head of client management for securities finance at State Street, echoed the comments from Benish, noting that beneficial owners in State Street’s client base who were historically only lending securities are now also running leveraged strategies and “crossing over to borrowing at the same time”.

“This makes it important not just to have a securities lending discussion, but a broader securities finance discussion. And it’s important to be able to meet those client needs in a holistic way,” he added.

Axel Hester, director of securities lending at State Street Global Advisors, highlighted that his firm is “evaluating considerations outside of a narrow historical focus on returns in securities lending”, adding that they have started to look “much more heavily” at the holistic programme. Whereas they may have previously focused on the returns, now various questions are being asked, such as ‘What are the risks associated with lending? What is the risk-return trade-off that has actually been experienced here?’

“I think that shift has allowed us to take a couple of steps forward in developing our organisational understanding and informing our investors. We are helping stakeholders understand that risks do exist but they are manageable if you know what they are and where they’re coming from. Therefore, we can strike the correct balance between risk and reward more effectively and understand how it’s impacting our portfolio and investment philosophies as a whole,” Hester stated.

He added that environmental, social and governance (ESG) aspects are now also being taken into consideration and Bill Smith, managing director, Americas sales executive at JP Morgan, expanded on this point, stressing that ESG “will be something that is yet another factor that we will need to support in the future”. He claimed that while ESG considerations are growing in the US securities lending market, he believes it is “at a pace behind Europe for the moment”.

Smith added: “Clients are going to have requirements around ESG and we are going to expand our platforms and product offerings to include customised collateral sets and customised lending rules that will be supportive of clients’ ESG requirements. It will take technology investment to expand these capabilities.”

Nancy Allen, global product owner at DataLend, emphasised that the current focus on ESG “is a reflection of the shift of securities lending from a back-office commodity into a front-office investment product”.

“With that comes additional overlays and strategies that need to be deployed. There is more to consider than simply ticking a box and enrolling in lending; now beneficial owners are considering ESG, collateral, different types of borrowers and new trade structures,” she added.

Expanding on his earlier point, Hester added that, as investment managers, State Street Global Advisors wants to “know we are upholding our ESG principles and our governance standards throughout the investment process”.

“There are ways that you can manage ESG principles effectively, accomplish our goals, and still participate in lending. They are not mutually exclusive. However, there may be different approaches on how one manages the investment process, and hence, how one manages their lending programme to satisfy those governance requirements,” he concluded.

These comments have been taken from Global Investor’s US Beneficial Owners Roundtable, held in New York in December. The discussion features in the Beneficial Owners Supplement 2020.