The securities lending market has been a difficult one for service providers for several years now. Customers are becoming more demanding: they want to see higher margins, better customer service and lower risk. Meanwhile, the regulatory environment is becoming ever more complex, for example, as legislation responds to the requirements of the Basel III capital adequacy accord.
The avoidance of risk is, naturally, the major consideration for institutional investors when choosing a lending manager for their securities portfolios. This is particularly the case for official institutions. The experience of the financial crisis, when unexpected risks emerged that caused losses far greater than asset owners expected, is still a searing one for many institutions.
In this environment, it is also important for firms to be able to take a global approach. Returns on securities lending are more likely to be positive if an institution can take the widest possible view of the opportunities on offer in global markets. This sometimes involves commitments to tough markets.
Senior managers at institutional investors also say that flexibility is highly important. They often require a bespoke approach, affording maximum protection and flexibility, for example, through custom collateral funds, and intraday collateral margining and release processes.
Responding to these challenges takes not only vision and robust technology, it also requires attention to detail, persistence and hard work. Combining these attributes is a demanding task at a time when investors are becoming increasingly adept at asking the hard questions necessary to find those firms capable of fulfilling their needs.
Clients of Northern Trust say the Chicago-based financial institution shows these qualities to an extensive degree in its handling of securities lending portfolios.
One of Northern Trust’s securities lending clients is a specialist northern European financial services firm that manages investment funds for a variety of large public bodies. It chose Northern Trust as a securities lending manager after conducting rigorous due diligence on a wide range of potential firms. A senior manager at the institution involved in the decision says that, during the selection process, the firm decided Northern Trust was “clearly the strongest” in the securities lending field.
Northern Trust has not only met but exceeded this client’s expectations, the senior manager says. The firm was particularly impressed by the smoothness with which Northern Trust handled all stages of the securities lending process: “Funds can be invested without any problems, and recalled without problems.” This is perhaps the investment firm’s top priority, he explains.
Northern Trust is the only securities lender we have had almost no operational incidents with, and when one occurs, it is resolved in a timely matter
Senior manager, specialist northern European financial services firm
“Besides expecting an above-market performance, we also expect a securities lending programme without any operational incidents,” the senior manager tells Central Banking. This makes the Chicago-based firm stand out in his experience: “Northern Trust is the only securities lender we have had almost no operational incidents with, and when one occurs, it is resolved in a timely matter.”
There is no doubt that Northern Trust has a rock-solid approach to risk management, he adds: “For us, this is very important.”
“A really decent performance”
Returns on investment were another key factor besides risk management and operational smoothness in choosing Northern Trust. The performance there has been good throughout Northern Trust’s management of the contract, the manager says, and has strengthened recently.
“We have also seen good returns from Northern, and these have improved over time,” he says. The firm’s returns on its securities lending portfolio represent “a really decent performance”.
The geographic spread of Northern Trust’s coverage also greatly increases the efficiency with which the securities lending portfolio is handled, the manager tells Central Banking: “They are also able to provide a global market for us. I’m not sure that all securities lending agents are able to provide that like Northern Trust.”
A senior manager at a European state pension fund says Northern Trust’s management of securities lending is “very smooth operationally”
A senior manager at a European state pension fund says Northern Trust’s management of securities lending is “very smooth operationally”. The fund has entrusted Northern Trust with its securities lending for more than a decade, and has benefited from the relationship, he says.
Northern Trust has been able to get some good returns for the fund from lending out its securities, despite the low-yield environment of recent years, he tells Central Banking, pointing to the firm’s global coverage being helpful in achieving this. Northern Trust also scored highly for its ability to listen carefully to its clients: “They have been open-minded, and listened to what we were trying to achieve.”
Central Banking heard more praise for Northern Trust’s approach to handling securities lending from a central bank in an emerging market country. With a reputation for competence and prudence, this bank said it would not entrust its securities lending portfolio to any manager that did not satisfy its strict standards.
Northern Trust has managed the central bank’s securities lending for many years. During that time, the central bank has paid close attention to how the firm has managed the risks associated with its portfolio, and points out that Northern Trust has shown great flexibility in customising its management programmes in line with the bank’s due diligence requirements.
Northern Trust’s management of the institution’s securities lending portfolio has generated significant revenue for the bank, and the Chicago-based company has been proactive, suggesting a variety of ways to broaden revenue in the changing environment.
Holders of securities are making increasing demands of the firms they hire to run their lending programmes. The testimony of clients that have hired Northern Trust portrays an institution that combines a rigorous approach to risk, a global perspective on markets, an assured handling of operational matters and the ability to make consistent returns. This formidable combination makes Northern Trust a leading provider of securities lending services and a worthy recipient of this award.
The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Iris Yeung, Joel Clark and Tristan Carlyle