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Fixed Income Lending on the Rise in Australia, eSecLending Says

Posted: 15 Feb 2012

There is an increasing focus on the lending of fixed income securities in the Australian market, according to eSecLending, a leading global securities lending agent.

“While equities are still being lent and demand exists there is a shift toward more focus on the fixed income space in Australia,” says Giselle Awad, a senior vice president at eSecLending. “There has been a move towards introducing tri-party agents to the market, and that has brought more international players. The RBA [Reserve Bank of Australia] is very focused on the fixed interest space in the sense of bringing more liquidity to the market. There are a lot of high-grade assets that aren’t moving around the market. By introducing tri-party repo, having more participants and encouraging repo, it does help facilitate the general liquidity in the market.”

There has been increased focus on lending and borrowing of fixed income assets driven by both domestic and international demand, Awad says.

“I think it works both ways,” Awad says. “Superannuation funds are lending their fixed income assets, and there are offshore holders of Australian fixed income that are being encouraged to lend into the market. Insurance companies in Australia may also start to play a role because of the changes to APRA [Australian Prudential Regulation Authority] rules that they’re required to hold more fixed income on their balance sheets.”

The Australian demand for fixed income assets to borrow is driven by market need to meet collateral obligations. Awad also points to the potential for the Australian market to then move on to lending cash in repo transactions, noting that Australia could follow on from developments in the U.S., in which corporate institutions that are long on cash are deriving additional revenue by using the cash in a repo transaction.

“This hasn’t been a focus in the Australian market as yet, but it’s applicable,” she says. “For Australia, they’re just expanding on the fixed income market and building the infrastructure, which needs to happen before cash can be placed.”

Meanwhile, eSecLending’s new ProxyValue service has attracted attention from clients in Australia. ProxyValue was launched last month in conjunction with Institutional Shareholder Services (ISS) to provide clients with information to balance the objectives of generating revenue through securities lending versus the corporate governance responsibilities of proxy voting.

“We found that there was nothing out there that says to the beneficial owner, ‘Here is a situation when you need to vote the proxy versus the profitability of the loan,’” says Peter Bassler, managing director of eSecLending. “As the fiduciary or the fund manager, you want to demonstrate strong corporate governance, and you want to generate the return. This gives the tools to manage the information on both of those competing objectives. It allows a client to set the metrics so they can customise on how they want to use this. It addresses a need – proxy voting is the one major right for a long holder that you give up when you loan your securities.”

Awad notes that ProxyValue should fit well into the Australian market.

“It has piqued interest, and it’s a service that we’re providing to clients for them to better manage the process and fulfil their fiduciary duties,” Awad says. “This might be one variable that might help potential clients make a decision in our favour, because it’s distinct to services in the custodial model. Australian funds do take corporate governance and voting obligations seriously, so it is something they’re interested in, and they’re familiar with ISS.”

(RA)

If you have any comments about this story or news tips, contact Christopher Gohlke in New York at cgohlke@globalcustodian.com or Janet Du Chenne in London at jduchenne@globalcustodian.com.