 
August 2011
Securities lending market update - Q2 2011  (10 votes, average: 4.80 out of 5) Loading ...
In our recap of Q2 2011, the spectre of US default and the European debt crisis weighed upon global securities lending activity. North American markets prepared for a gradual unwinding of the US Federal Reserve stimulus and awaited political agreement on the national debt ceiling. In this edition we explore the impact on US money market rates and the prospects for increased activity in the third quarter. The uncertainty in North America spread to Asia Pacific where markets fell following disappointing economic data from Washington. Japan continued to suffer the effects of its earthquake and Tsunami with little demand for stock lending. However, Hong Kong remained robust with strong flow and specials activity, while Australian and New Zealand banks saw increased demand for DRIP trades. In Europe the Greek debt crisis undermined the Eurozone. Increased attention to capital management meant counterparties were pressed to focus on select markets such as German securities, which attracted strong interest. However, concerns abound of the French banking sector’s exposure to Greek debt. Despite limited M&A activity, lower hedge fund trading and short interest, loan volumes showed improvement with some specials activity materializing. Strong seasonal demand for European equities and long duration fixed income loans were also prominent. As regulation drives change, new trade structures will present opportunities. It may be some time before the volumes of 2008 return but current activity indicates a positive outlook. We trust you find this information relevant to your business and, as always, we welcome your feedback. North American markets
Economic indicators & trends Canada: The S&P/TSX Composite Index lost 3.3% in June to close at 13,300. Shares of Research in Motion, Suncor and Sino-Forest were among the biggest decliners. The S&P 500 finished down 1.7%, while the Dow decreased 1.1%. The Canadian dollar strengthened relative to the US dollar, closing the quarter at 1.0432. The Bank of Canada announced on May 31 that it is maintaining its target for the overnight rate at 1 per cent and commented about a potential increase, saying it will raise rates ‘eventually’ as the economy recovers. The bank’s next decisions are scheduled for September 7 and October 25. The September date is the most likely for a rate increase announcement. Securities lending insights Equity revenue in the US was driven by speculative shorts driving the directional plays, while Canada remained predominantly opportunistic around bank and financial dividend reinvestment (DRIP) trade activity outside a trickle of specials. Ritchie Brothers Auctioneers remained the top short in Canada, however rates continued to decline as more stock became available with short covering driving rates down. First Solar was among the top US names in the quarter as short interest in the directional name hit a 52-week high. Rates spiked on the back of diminishing lendable inventory and buy-in issues. In-demand securities:
European markets
Economic indicators & trends Securities lending insights Despite overall merger & acquisition and specials activity remaining subdued in comparison with previous years, continued signs of improvement were prevalent with some specials activity materializing during the quarter. Strong counterparty demand for SMA Solar Technology continued due to lack of liquidity, driven by directional interest. SMA was knocked from the top spot for special activity towards the end of Q2 and replaced with directional interest for Pandora, a Danish Company—due to market concerns and perceptions about the company’s business model and product offering as not well diversified. Aixtron, a German directional name continues to be in high demand. Impending regulation continues to impact all areas of the financial markets and the securities lending industry is not immune. Basel III is arguably the most talked about piece of regulation affecting the banking sector and this will have profound implications on the securities lending business. The reforms will raise the quantity and quality of the regulatory capital banks are required to maintain and as a result banks will increasingly seek to optimise the use of capital. Trade structure and selection will be key for the borrowers in managing their balance sheet and capital. In addition, the upcoming Basel III regulations on bank liquidity measures are influencing the direction and duration of securities lending transactions. These reforms are presenting additional government debt trade opportunities as borrowers increasingly look for longer term loans in order to position themselves to meet the new liquidity requirements. As noted in Q1, the demand for high quality government bonds continued to remain strong throughout the second quarter. For beneficial owners willing to be flexible on the term of the loan and the collateral required, increased utilization or fee levels can be realized as more bonds are lent for term rather than an open basis. Collateral flexibility from lenders is highly valued by the borrowers due to the widening cost differential between various types of collateral and the impact that this may have to their balance sheet. Since the 2008 market events the cost of collateral has been one of the most significant factors in determining demand. In-demand securities:
Asia Pacific markets
Economic indicators & trends Securities lending insights Japan continues to suffer from the effects of the earthquake and Tsunami. The market decline and lack of corporate activity has impacted stock lending demand. In Australia, the requirement to have a presently exercisable and unconditional right to vest’ before trading has meant most of the prime brokers have built up internal inventory to facilitate their hedge fund clients’ trade requirements. This can be done by either borrowing the securities from traditional lenders or buying the securities outright themselves. Directional interest in BHP started building again as it hit a three-year trading high of $49.5 and mergers and acquisition rumours of a Woodside takeover surfaced. Hong Kong still stands out from other markets in the region from a flow and specials perspective. Short Interest achieved a 9-month high as Chinese shares such as Real Gold, China Yuran and Sino Forest were in demand due to directional interest stemming from global financial concerns around reduced demand for companies’ products and services. In Singapore demand was generated from Hyflux, a directional name and OCBC, UOB and DBS for related scrip opportunities. In-demand securities:
For additional information on RBC Dexia’s securities lending capabilities, please contact: Blair McPherson Mary Jane Schuessler Stephen Rudland Trevor Amoils
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