February 2012
Securities lending market update
As one would expect with current global market conditions, securities lending markets remain timid this year and broadly in line with expectations. The lowlights for 2012 have been blue-chip equity demand in Canada and the U.S., while highlights continue to be demand for government debt and IPO’s.
As one could expect, risk remains the primary focus of our internal activities. The events surrounding Greece and the Eurozone have affected the global markets considerably, and continue in many ways. Our risk and compliance teams are focused on managing external factors such as collateral, counterparty and country risks as they pertain to our securities lending business; the control groups have done a very good job of setting a structure which allows for returns in a managed environment. We continue to see great returns in areas in which we specialize, including high-demand stocks such as those mentioned below. Our attention remains focused on delivering quality lending returns while not increasing operational and portfolio risks, and as such we tend not to lend voluminous amounts of client assets to improve our statistics.
On that note, IPO and M&A demand is close to insatiable; while we have not seen broad-market demand, select specials like Zynga, Caesars and Groupon have generated significant demand (and fees) from borrowers. Caesars shares opened at $9 on their IPO in February and quickly traded as high as $17; since that point we have seen a retraction for the stock which currently trades in the $12 range. Directional demand in stocks like Caesars or Zynga (ZNGA has been lent at fees as high as 51 per cent of its value) can create material portfolio-specific demand and revenues.
We also see a growing demand for cash as collateral, as many Canadian banks remain holders of sizeable cash balances. On the fixed income side of our business, loans collateralized with cash generate about double the returns of their non-cash collateral counterparts, and the rebated interest we pay to borrowers can be a valuable source of overnight revenues for banks. Fixed income revenues have grown as many pension plans and mutual fund investors continue to flock to the relative safety of bonds; much of this fixed income growth has come at the expense of small/mid-cap equity portfolios, as we see portfolio flows out of smaller cap equities into bonds.
The market uncertainty that has resulted from the events in the Eurozone and Greece will undoubtedly leave its mark on global dividend season this year. Given the fact that Greece has not reached a debt deal and its tenure in the Eurozone is suspect at best, the market continues to price in a significant amount of risk. We have seen some large-cap companies already announce dividend reductions and we expect this to continue as we approach April and May. While 2012 is clearly not as rosy globally as 2011, we still see significant upside from corporate profits, which remain strong.
Overall, given the side-effects in the market this year, we feel 2012 is off to a very good start. While we will continue to monitor the macroeconomic effects of the Euro crisis and make strategic changes where necessary, the vast majority of our securities lending business continues to be unaffected by uncertainty in overseas markets.
By Jeffrey Alexander
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Trade Talk® is provided for general information purposes only and CIBC Mellon Global Securities Services Company, CIBC Mellon Trust Company, CIBC, The Bank of New York Mellon Corporation and their affiliates make no representations or warranties as to its accuracy or completeness. Readers should be aware the content of this publication should not be regarded as legal, tax, accounting, investment, financial or other professional advice nor is it intended for such use.
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