• The drive for five

23 April 2021

The results of the Global Investor 2021 Beneficial Owners Survey reflect an investor focus on five areas of service differentiation against the backdrop of the stressed market conditions, say Deutsche Bank’s agency securities lending experts Johnny Grimes and Zorawar Singh

Ambitions remain high for 2021 as Deutsche Bank seeks to build on its success in the 2021 Beneficial Owners Survey where it was the top ranked  agent in the EMEA region for a fourth successive year. 

“Our existing and prospective clients were presented with a series of extraordinary liquidity challenges over the past twelve months and this award is testament to the innovation and endeavour of our agency securities lending team to help address those investor requirements through tailored transaction frameworks.  Amongst the five evaluation criteria that we accomplished a top rating in, the success in collateral management and client responsiveness are particularly relevant in this context,” says Zorawar Singh, Global Head of Off Balance Sheet Solutions at Deutsche Bank. 

The award for income generation indicates that Deutsche Bank has traded well (as a securities finance agent) throughout the crisis and outperformed its peers in that space. According to Johnny Grimes, the bank’s Global Head of Liquidity Product and Transactional FX, “In an industry where revenue contracted by as much as 12% in 2020, to achieve the top rating by clients for income generation is particularly satisfying and is evidence of continued client willingness to work on a consultative basis with our trading desks, to evaluate and commit to incremental trade opportunities.”

2020 – Liquidity, liquidity, liquidity

Singh believes that the management of liquidity was the primary motivation influencing institutional investors in their use of securities lending and repo in 2020.  This was particularly evident amongst central banks and pension funds – both traditional core client constituencies for the Deutsche Bank’s Agency Securities Lending business.  It was similarly a priority for corporate treasurers – an investor grouping who have not tended to gravitate towards securities lending in its traditional revenue capture sense.

Zorawar Singh, Global head of Off Balance Sheet Solutions, Deutsche Bank“In addition to institutional investors using securities lending and repo to manage their liquidity in 2020, it was similarly a priority for corporate treasurers”
Zorawar Singh, Global head of Off Balance Sheet Solutions, Deutsche Bank

Central banks were probably the busiest market protagonists in 2020.  The measures they implemented to mitigate the negative economic effects of the pandemic were on a scale and timeline without precedent.  The Eurosystem unveiled a series of monetary policy responses in March 2020 including the establishment of the now €1.85tn Pandemic Emergency Purchase Programme (PEPP). 

Importantly the Eurosystem monetary authorities extended the securities lending framework that supplements the operations of longer standing quantitative easing facilities, to include the newly initiated PEPP.  This ensures that the Eurosystem securities lending facilities continue to serve as an effective backstop, supporting bond and repo market liquidity without unduly curtailing normal repo market activity. 

“Agency securities lending is part of the transmission mechanism for a number of these securities lending facilities – a solution with highly customised and complex guidelines governing eligible counterparty, collateral, pricing, concentration and term characteristics,” says Grimes.  “These mandates are highly consultative in character and extensively leverage market analytics to support the evaluation of liquidity outcomes”.

Singh adds: “As a mainly third party (non-custodian) lending agent, our operating model is inherently agile as it services more sophisticated investors who decouple securities services and securities lending to optimise the outcome of the latter service.  This agility is a key differentiator in framing liquidity solutions that are often idiosyncratic to each client’s circumstances”. 

Pension Funds are another key beneficial owner group in the securities lending sector commanding over a quarter of total industry lendables and a third of outstanding loan balances.

Liquidity is a cornerstone of pension fund management.  The volatility in market valuations during March and April 2020 translated into a dramatic increase in the requirement to access cash to meet the margin calls on the derivatives overlay and foreign-exchange hedges that are integral to pension fund operations.  According to Singh, “from Q1 2020, we witnessed a considerable increase in the volume and depth of inquiries from pension funds around how to harness cash collateral raised within our programme to meet the demand for margin calls in unrelated products – a product we refer to as Agency Repo.”

Grimes highlights that “Our Agency Repo solutions are multi-currency and can be reinforced with balance sheet backed commitments to immunise against potential liquidity disruption caused by reduced bank intermediation in repo markets over key accounting dates or other periods of market stress”.

In terms of industry RFP activity in 2020 and YTD 2021, Deutsche Bank observes a significantly greater focus by asset owners (such as pension funds, insurance companies, and sovereign investors) in  formally evaluating Agency Repo solutions where they use the established legal, trading, risk and operations infrastructure of an agent lender to gain access to secured markets.

Singh opines that “since the 2008 global financial crisis, investors have witnessed a series of lesser volatility events that nonetheless focused minds on the associated liquidity and funding challenges.  Institutional investors are increasingly conscious of moving beyond pure regulatory compliance to standards such as the uncleared margin rules (UMR)1 . Instead, they want contingency funding frameworks that will serve them during future dislocations in liquidity – originating from populism movements, geopolitical tensions, environmental events or cybersecurity threats – the frequency and magnitude of which is unclear.”

Two sides – one coin

In response to the heightened volatility experienced in 2020, treasurers have increased their cash buffers, and notably across different currencies, to ensure they have ready access to liquidity and to avoid being forced sellers in strained equity or private markets in particular.

Singh advises that “in this context Deutsche Bank’s Agency repo offering is dual faceted.  As mentioned previously it is highly effective in generating multi-currency term funding through the mobilisation of an institutional investor’s long HQLA positions.  Equally, it is a standalone solution for treasurers to diversify their investment allocation beyond deposits and money market funds to include access to secured investment markets and reduces the potential performance downside associated with managing significant cash buffers.”

Interestingly, the use of agency repo as a tool to manage excess cash also widens the prospective client dialogue beyond traditional securities lending asset manager and asset owner relationships to include corporate treasurers.  “Corporates are a cornerstone of Deutsche Bank’s client base for over 150 years and supporting their evolving treasury requirements through varying market conditions is a central pillar of our enterprise strategy.  We believe that agency repo represents an important supplemental liquidity management option for Treasurers alongside our traditional cash and liquidity offerings” says Grimes. 

Delivering liquidity management solutions – either funding or as an investment mechanism – differs materially from traditional securities lending where agent lenders capture value by managing client portfolios through a loan allocation algorithm in the context of an industry where supply exceeds demand by a factor of 10:1.

“Successful liquidity outcomes rely on a deep understanding of the specific treasury requirements of each client – in both routine and strained market conditions – and aligning that with our market expertise and distribution capabilities across various financing market counterparties.  The result is individualised solutions underpinned by our historical strengths in working with sophisticated investors on complex, customised solutions supported by operating model agility and deep enterprise relationships. These are hallmarks of Deutsche Bank’s lending programme for over three decades” according to Singh.

Johnny Grimes, Global Head of Liquidity Product and Transactional FX, Deutsche Bank“We expect to witness continued momentum in the agency repo business as investors optimise their liquidity management and contingency frameworks”
Johnny Grimes, Global Head of Liquidity Product and Transactional FX, Deutsche Bank

Grimes concludes that “we expect to witness continued momentum in the agency repo business as investors optimise liquidity management and contingency frameworks and de-couple these from the safekeeping and settlement services of traditional custodians.  This is complementary to our longstanding securities lending business and reinforces the relevance and sustainability of the business across Deutsche Bank’s Corporate Bank.”


1 See https://bit.ly/3sIUnaP at deloitte.com

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