SPONSORED PROFILE: Refresh and renew

Brian_StauntonIn the wake of the Lehmans default, Citi accelerated its review process and increased its efforts to keep clients educated and informed. Citi has been in the securities lending market since 1978 and has seen its business increase significantly in that time. It now has securities lending centres in New York, London, Hong Kong, Tokyo, Sydney and Mexico City.
Most industries have changed hugely in the last 32 years and for securities lending one might imagine that a great deal of change followed the events of 2008 but, says Brian Staunton, Head of Securities lending EMEA at Citi, the fundamental basic role of a securities lending agent has not changed. “Our role is to lend assets on behalf of beneficial owners, to manage the collateral involved and to provide reporting on that lending and collateral process. That has not changed fundamentally.”
What has changed, though, in the wake of the Lehmans default, is the lenders’ view of securities lending. “Prior to the Lehmans collapse, the industry had not really seen a default of that scale. From a Citi perspective, all of the default processes we had in place worked very well, but it is understandable that the lenders and everyone else in the market reassesses their processes and arrangements and looks at how things may be done differently.”
In fact, says Staunton, the biggest effect on the securities lending market was not the default itself but the reaction to it, particularly the fact that a large number
of markets imposed temporary and uncoordinated bans on short selling. “This was what led lenders to suspend their securities lending programmes because they did not want to be seen to be contributing to the volatility in local markets nor to be contravening local temporary regulations on short selling.” Counterparty exposure
There are ways that the securities lending market is able to deal with counterparty exposure, says Staunton. Counterparties can be removed from a list of accepted counterparties or subjected to higher credit stipulations or collateral demands. And many lenders were already reviewing their counterparty risk management prior to the events of September 2008.
The review process was certainly accelerated in the wake of the Lehmans default, admits Staunton. “High-quality government bonds became the accepted form of collateral and there was a move away from accepting cash as collateral because so many lenders lost money when reinvesting cash. Even in my own programme where lenders suffered no losses, they were very cautious with cash collateral and many switched from accepting cash to only taking government bonds. And lenders have become much more attuned to the risk of being overexposed to a single counterparty.”
The biggest change that Staunton has noticed on the lenders’ side is the fact that securities lending has moved from being managed as a back-office activity to one in the front-office in light of the greater awareness of the risk involved in securities lending. “In the front office there are people that understand trading and can identify, assess, calculate and manage risk and price it accordingly.”
This move from back to front office has also changed the role of the securities lending agent and what is required of them, says Staunton. “Our job is to provide more sophisticated data and, in many cases, to supply the raw data rather than a pre-formatted report. This means lenders are able to upload the data into their own engines and feed it into their own risk models which are often looking at counterparty exposure across the entire organisation and not just in the securities lending division.” Consequently, Citi has invested a lot in its IT to ensure that it can offer a more flexible provision to clients in terms of what data is supplied and in what format. Education
Another key change that Citi has made is to increase its efforts to keep clients educated and informed of market developments and opportunities through regular roundtables and in-depth reports detailing how market events may impact their business.
In terms of Stanton’s prognosis for next year, he is confident that the pick-up in hedge fund activity that has been evident in 2010 will continue into 2011. And he is expectant that there could be some significant changes for the securities lending agents in terms of their client bases.
“We have seen third-party securities lending become more popular in the last two years. A number  of lenders have lost money in the last two years through their cash reinvestment programme  and are now looking to appoint a third-party securities lending agent in addition or to replace their current agent lender. So I expect to see a lot more mandates for third-party securities lending agents that are not necessarily tied to, say, an RFP for custody. ©2011 funds europe

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