By Ed Bond, Head of Agency Securities Lending and Collateral Management, Asia Pacific, J.P. Morgan.
2018 was a transformational year for J.P. Morgan’s Agency Securities Lending business, with an organisational realignment and hiring plan to better reflect client demands and market nuances in the three global regions. Our focus has been on ensuring that we provide relevant expertise to our local client base and the counterparts that we deal with, whilst maintaining global excellence. The changes we have made to our business ensure that we have a full front-to-back offering in each region, allowing for in-region strategic decision making and timely resolution of any client queries. This realignment was well-received by our clients globally as evident with J.P. Morgan Agency Securities Lending being announced as the winner of Global Investor’s Annual Beneficial Owners’ survey in 2019*.
This realignment is especially significant within Asia Pacific, which represents a high growth region for us with an established and expanding client base comprising asset managers, central banks, pension funds and sovereign wealth funds. By building out our product proposition across the different Asia Pacific markets and investing in our technology and operations footprint throughout the region, we can constantly adapt to our clients’ needs. Globally, under the leadership of Ben Challice, J.P. Morgan’s global head of Trading Services, some of the initiatives we have focused on of late include well-publicised developments in the market:
There remains a continued push from borrowers for agency securities lenders to provide financial resource-efficient solutions to their financing needs. In response to this, J.P. Morgan Agency Securities Lending introduced its collateral pledge structure during Q4 2018.
J.P. Morgan is the first securities lending agent to create a scalable, holistic solution with multiple counterparties collateralizing with J.P. Morgan as a tri-party agent. This transformative initiative enables borrowers to reduce their counterparty Risk-Weighted Assets (RWA) footprint and allows them to face a broader range of beneficial owners. As borrowers pursue capital-efficient products (securities collateral via a pledge as opposed to a title transfer basis), this drives discussions with our lending clients who continue to seek additional returns on their assets.
For beneficial owners that adopt J.P. Morgan’s collateral pledge structure, there is the potential to share in any capital benefits a borrower may have through improved utilization and returns. It is important to note that our beneficial owners have the option whether or not to participate in our collateral pledge structure, which is covered under our indemnity programme. Despite the current lack of any standardised ISLA documentation, we have seen some of our largest clients sign up for collateral pledge.
Next Generation Agency Securities Lending
As clients’ needs evolve rapidly, various industry initiatives are creating new sophisticated product offerings for portfolio optimization. Whilst traditional forms of alpha generation remain fundamental, J.P. Morgan Agency Securities Lending is embracing new innovation and looking at the possibility of extending our programme to connect counterparties with financing or structural trading needs in ways that have not been looked at previously. Being equally mindful of the capital and regulatory implications, we are well-positioned to price these trades appropriately so as to optimise client returns in parallel to the return on capital for our shareholders.
In addition to innovative product development offerings, J.P. Morgan continues to reinforce its commitment to Agency Securities Lending through significant investments in technology. Innovation is a priority for the firm as a whole—as evident from the US$10.8 billion we announced as our planned 2018 technology spend, up 15% from 2017, and including more than $5 billion for new investments.
One such multi-year initiative is our investment in a new global proprietary lending platform, with the goal of being state of the art. Designed to be more than simply a trading and analytics platform, it will provide pre and post trade functional excellence and flexibility, positioning J.P. Morgan for faster responses to evolving client, market and regulatory demands.
Just as broker dealers seek financial resource efficient solutions, they also seek greater connectivity and levels of straight-through processing (STP) from agency lenders. Whilst automation significantly reduces operational costs and risks, it also allows our trading teams to focus on more high value revenue opportunities and a better overall client experience. The analysis of aggregated large data sets helps our traders make better informed trading decisions and identify new revenue opportunities which are aligned with each beneficial owner’s investment mandate. This also assists our relationship managers in explaining performance results to our clients so that they can make more informed decisions regarding their securities lending programmes.
As the concept of sustainability gains broadening appeal, we see beneficial owners, particularly pension funds, increasingly drawn to the concepts of environmental, social and governance (ESG) and being responsible asset owners. As a result, pension funds are keen to demonstrate their participation in proxy voting. In this context, for J.P. Morgan, it is about having appropriate dialogue, adding colour, and explaining that clients can still be responsible to their shareholders without necessarily disrupting securities lending trades that are generating revenue for their portfolio. Rather than recalling a whole onloan book, it is our responsibility to make sure alternatives are considered and to work with clients as their needs evolve.
We’re also seeing changes in behaviours in underlying investment exposures, which comes back to ESG. Some funds are taking single names or industries out of their portfolios. They would prefer participating in a lending programme that concurrently optimises portfolio returns and satisfies commitments to their respective social and sustainability goals.
In summary, today’s Agency Securities Lending market continues to evolve with clients’ desire to be responsible investors. They are demanding sounder risk management practices and new trade ideas whilst embracing data and more sophisticated technology. Furthermore, we see lenders who previously exited their lending programmes during the 2008 financial crisis returning to the market along with first-time entrants and clients of all types looking to expand their collateral acceptance.
2019 will continue along the themes highlighted in this article, with efficiency and optimisation being at the forefront. J.P. Morgan Agency Securities Lending sees exciting opportunities ahead. Our dedicated Securities Lending professionals look forward to partnering with clients and counterparties to provide innovative solutions across both the traditional, as well as alternative, financing space.
* J.P. Morgan’s Agency Securities Lending business recorded the highest joint weighted total across the three main regions in Global Investor’s 2019 Beneficial Owners’ survey, with a total of 17.56 comprising 6.15 in the Asia-Pacific, 5.72 in the Americas and 5.69 in EMEA. The US lender was even stronger in the unweighted category where J.P. Morgan scored 18.88 due to 6.60 in EMEA, 6.53 in Asia-Pacific and 5.75 in the Americas.