The MENA region is home to some of the largest asset owners who are now deepening access to international markets – including through securities finance programmes. Jérôme Cazaux and Alessandro Cavallari of Societe Generale Securities Services (SGSS) say customisation of lending arrangements is crucial.
Volatility remains a hallmark of stock markets, but securities lending and repo remain popular tools for generating additional returns. This is the case not just in the US and Europe but increasingly in the Middle East, where market participants are either looking to enter or bolster their existing programmes.
Overall, it has been a bumper year so far for securities lending across the globe, according to the Q1 report card from S&P Global. This is despite uncertainty in the first three months of the year due to continuing inflationary pressures and unpredictable monetary policies.
The S&P report found that Q1 of 2023 was one of the most buoyant in recent history for securities lending. Around $3.41 billion in revenues were generated - a 24.5% hike over the same period in 2021. In addition, every month of Q1 exceeded the $1 billion mark, with the lowest revenue generated being February, at $1.05 billion.
Securities finance revenues across the EMEA region were particularly healthy, with a 41% year-on-year and 85.5% month-on-month rise. The report noted that the tally for the first three months was $376 million, which was one of the best figures seen for several years. The March monthly revenue figure was the highest since April 2022 and benefitted from $60 million of revenues from Swiss equities.
Surge in trading
One of the main features of 2023 was the key role played by cash collateral in generating risk-adjusted returns for lenders. In addition, eurozone equity markets finished the quarter in positive territory while ETFs remained a mainstay for lenders, although momentum has slowed over the past few months. Strong fixed-income markets also provided a fillip, with both government and corporate bonds sustaining their near-record performances recorded over 2022.
The repo markets in Europe proved robust, too. Repo grew 7% in the second half of last year to top €10 trillion for the first time, according to the European Repo and Collateral Council report from the International Capital Market Association (ICMA).
It attributed the increase to a range of factors, including collateral scarcity, uncertainty over the direction of central bank monetary policies, and the shock of the UK “mini-budget” last September. The ICMA also noted a jump in cash-driven trading in response to rising interest rates.
According to the organisation, the market turmoil fuelled an unexpected surge in trading as dealers aimed to cover short positions against further interest rate increases, and investors sought safe-haven assets. This also helped to boost demand for German and other key eurozone government securities.
Growing demand in MENA
Against this backdrop, there is a growing demand for access to worldwide markets in the Middle East & North Africa region. The region is home to some of the largest sovereign wealth funds, pension funds, family offices, insurers and multi-billion and even one multi-trillion-sized investors. Given their size and scale, these buy-side firms and asset owners require a well-established agency lender with a domestic and global reach that can provide a one-stop-shop service to optimise portfolios and provide custody.
The ability to customise securities lending programmes is more important than ever. Programmes need to be tailored to the specific requirements of buy-side firms, such as risk profiles and regulatory parameters, and bespoke collateral management in securities and/or cash, with re-investment going into money-market funds or reverse repos.
Equally as significant is the ability to provide liquidity across asset classes and extract the repo and lending intrinsic value of a portfolio that applies the best execution and competitive revenue sharing. Flexibility is also crucial, and solutions must enable securities to be recalled and/or switched, particularly in case of sale.
While these front-line services are paramount, the provision of ongoing monitoring should not be underestimated in the Middle East as well as other regions. Buy-side firms should look to partner with an agency lender who can offer a comprehensive reporting service, comprising monthly and daily operational reports in different formats, as well as income reports split by portfolio and product. There need to be detailed stock positions and stock valuation summaries with a comparison between the lent-securities valuation and the received collateral valuation. At Societe Generale, helping our clients enhance the profitability of their investments, be they large or medium size players, is a priority. Securities lending with SGSS is therefore an opportunity to generate additional revenue with no impact on the core activity of the client, thanks to a flexible, 100% externalised and easy-to-implement product.
Although outlooks are always difficult to predict, there is no doubt that existing market players and new entrants to securities lending and repo must work with experienced firms equipped with the latest technology to mitigate risks and leverage opportunities in unpredictable markets.
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