Sec finance: Managing collateral and liquidity in the face of Covid 

In our recent securities finance roundtable, Xavier Bouthors, senior portfolio manager, treasury and fixed income solutions at NN Investment Partners, shares his views on ESG integration and a wider set of issues, including industry responses to the Covid pandemic.

Have you refined your sec finance and liquidity management strategies with onset of the Covid crisis?

It has certainly been a different crisis than 2008. At that time, banks were returning everything on their loan books to ensure they could recover their collateral. In 2020, buy-side firms have focused on ensuring they could meet their liquidity requirements, covering possible redemptions and the need to meet margin calls. A lot of banks were knocking on our door to access high-quality collateral, particularly core European government bonds and US treasuries which were in high demand in March, but also Japanese government bonds (JGBs) and other high-quality liquid assets.

A point of difference on this occasion was that banks were not simply looking to lock in these high-grade assets for one month or less – rather they were looking to borrow for three, six and sometimes nine months. The message we were getting in March was, “If this crisis is as bad as our modelling predicts, we need to lock in some high-quality government bonds on our balance sheet”.

We needed to adapt to the particular circumstances of this crisis, but we have managed our way through it. The industry was forced to adjust, at short notice, to full remote working. This presented initial challenges from an IT standpoint, but the organisation responded quickly and made available the resources needed to make this transition. We identified similar flexibility from many of our counterparties. It was impressive to see the industry adjust so quickly to managing large asset portfolios from a home working environment.

What are the priorities for the securities lending and financing community in driving ESG integration? 

ESG issues have been high on our agenda at NN IP for a number of years and these are heavily integrated into our securities lending and financing programmes. This centres on establishing a clear securities lending strategy in consultation with asset owner clients, providing guidance on how ESG screening will apply to loan securities and collateral and how voting requirements will be managed for stock in the lending programme. We also apply screening to the counterparties we do business with. 

We have been able to manage the challenge of voting loan stock effectively with our lending agent. But not all lending agents are the same. We have also spoken to other lending agents that take the view: “Voting on loan stock is not our problem. If you want to vote stock in your securities lending programme, find yourself a way of dealing with it.”

Read the full roundtable here: Securities finance roundtable: Time for the tin hats?

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