Data
Caut iously
Ahead?
In the wake of 2008, asset owners are
hesitantly returning to the securities lending
world. The landscape, however, has changed
dramatically since they left.
When one billion dollars evaporates, people notice. This lesson was learned—and learned very publicly—by the California Public Employees’ Retirement System (CalPERS)
last August when it announced an unrealized loss of $854.3 million
in its internally managed securities-lending program. While the loss
actually occurred via poor reinvestment of the cash that collateralized
the securities’ loans, securities lending as a whole took the blame.
CalPERS’ experience has been echoed around America in the past
three years. Pensions, endowments, foundations, and insurance funds
took hits. However, ex-America securities-lending programs have
encountered fewer, if still some, issues over this time frame. The
reason: a pronounced difference in the percentage of beneficial owners
accepting cash as collateral for lending their portfolios. In Canada, for
example, only about 20% of programs utilize cash collateral, a far cry
from the nearly universal practice south of the border, according to
CIBC Mellon’s Senior Vice President, Capital Markets, James Slater.
“We are more conservative with our securities-lending programs, both
at CIBC Mellon and across the country,” Slater tells ai5000. “We, as
Canadians, can get poked fun of for our modesty, but [securities-
lending issues] turned out relatively well because of this.”
Although it may pain them to admit such a thing, American securities-
lending programs quickly emulated such conservatism following
their troubles—and, at least for the time being, continue to do so.
Indeed, what occurred and is occurring is nothing less than the
de-Americanization of American securities lending.
“Across the board, during the crisis and after, lenders have re-examined
their risk-return calculations,” says Kathy Rulong, Global Head of
Securities Lending for Bank of New York Mellon. “A lot of clients
were focused on revenue; now, there is a reassessment focused on
risk appetite. Post-Lehman, there was a push from clients everywhere
toward more non-cash collateral.”
The practical results of this shift are seen in the current demands of
beneficial owners. “A lot of clients now want separate accounts, and want
flexibility,” Rulong notes. “Clients also want greater transparency—this
has increased dramatically as a demand. Everyone wants daily reports
now.” In line with a theme seen across the asset owner spectrum,
pension funds, endowments and foundations, insurance and sovereign
