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From the magazine: Covid's major impact on securities lending

Matthew Chessum Aberdeen Standard Investments, securities lendingMatthew Chessum, who heads securities lending at Aberdeen Standard Investment, took part in Funds Europe's recent securities finance roundtable. He spoke about the impact of Covid-19 - but also about wider topics including the advancement of ESG in securities lending programmes.

Funds Europe - Which events have had most impact on securities lending and financing markets over the past 12 months? How have you adapted your strategy?

It will come as little surprise that the Covid-19 pandemic has had a major impact on securities lending revenue. Typically, volatility is good for securities lending, but the volatility we have witnessed during 2020 has not helped us, when considered alongside the high levels of economic uncertainty that have prevailed throughout the year.

Hedge funds have moved to ‘risk off’ and this has suppressed loan demand. There was strong demand for certain Covid-related ‘specials’ in the early weeks after the pandemic took hold, but this subsided as we moved into the summer months and, from August, there has been limited activity. To compound this, short-selling bans in some markets have also dampened demand to borrow securities.

Given the uncertainty in financial markets throughout 2020, it has been difficult to commit to major strategic changes when there is little certainty about what lies around the corner.

Funds Europe -  What are the next steps to promoting standardisation and harmonisation of market practice in securities financing ?

The digital agenda is central to the European Commission’s focus. The securities lending community is already moving ahead with this agenda, being the innovative solution finders that we are. Securities lending has already moved a long way in terms of applying technology. One illustration is that more than 90% of securities lending trading volume is now done through automated lending platforms. Few would have anticipated this 20 years ago.

Funds Europe - The Bank of England describes in its May 2020 Financial Stability Report how a sharp contraction in risk appetite at the start of the Covid crisis translated into a ‘flight for safety’ and then a ‘dash for cash’. How well did your liquidity management procedures stand up to this stress ?

We manage close to £60 billion in cash for ASI money market and liquidity funds through our desk and it is clear that this year-end [2020]  is going to be tough. Counterparties are pulling balance sheet already and trying to ensure that we are prepared. The [2020] year-end may be the most difficult we have seen for a number of years.

Nobody wants to take cash at the moment and it is difficult to pick up any sort of yield from cash deposits or reverse repo. It is a challenge to find a home for this cash - and to ensure we adhere to investment guidelines and have the right sort of diversification for each of the underlying investments.

Funds Europe -  What are the priorities for the securities lending and financing community in driving commitment to ESG principles ?

There has been a commitment to ESG within securities lending for many years. This has come to the forefront in recent times because it is integral to the investment strategy of many investment funds. But it is not a recent development. This is all about good corporate governance and good programme governance. Nothing has changed because ESG has come into the spotlight. We have always lived and breathed these principles.

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