Confidence, strength and global demand help make Canada the world’s second largest securities lending market.
By Jeffrey Alexander, Vice President, Global Securities Lending, CIBC Mellon
Canada has long been known around the globe for comparatively conservative business practices and a business environment that plays by the rules. Certainly in recent years, the prudent approach of Canada’s financial services firms, regulators and other market stakeholders has garnered international attention. Canada’s banks have been named among the world’s strongest for several years running. Our business and government stakeholders continue to work to create positive conditions for global investment into Canada. Canada is one of the few nations holding a triple-A credit rating for sovereign debt. In short, Canada’s prudent, stable environment has served our nation very well.
Perhaps less well known is the scale and sophistication of Canada’s securities lending markets compared to many global peers. Canada is in fact the world’s second largest securities lending market – trailing only the United States and approaching the scale of the total markets of Europe or Asia.
There are likely as many specific reasons for this as there are beneficial owners and investors who choose to participate in securities lending activities, but a few factors stand out in support of Canada’s market, namely: our triple-A credit rating; the scale and sophistication of many Canadian-based institutional investors; and, the confidence that participants take from Canada’s strong regulatory, governance and risk management practices.
Canada’s status as one of the few nations with a triple-A credit rating for sovereign debt has been a central driver for fixed income securities lending activities, as borrowers around the globe tap into Canadian government debt instruments to meet their need for high-quality collateral. Canada’s federal and provincial governments are important sources of high-quality debt, which is deployed in support of trading activities around the world. This strong and ongoing demand – for example, from broker/dealers acting as market makers – helps drive participation rates among beneficial owners holding debt instruments as part of long-term investment strategies. Securities lending activities can add a healthy source of risk-adjusted return to bond holdings, and the strong demand for these instruments has helped further improve that calculus for many beneficial owners.
On the equities front, lending and borrowing activities are driven by many Canadian institutional investors’ sophisticated approaches to asset liability management, which can include derivatives as a component. From a broker/dealer standpoint, derivatives creation generally requires appropriate risk hedging strategies, which in many cases involves borrowing assets to hedge various exposures. These derivative strategies drive a substantial volume of equity lending activities.
Ultimately, securities lending activities are a business decision based on each borrower and lender weighing the risk/reward equation. We are very proud to see that Canada’s markets have consistently provided the conditions that give borrowers and lenders the confidence that securities lending activities make sense as part of their investment strategies. From healthy regulatory activities that provide investors with confidence, to the strong control environments at place in many Canadian financial institutions, Canada’s securities lending markets are among the world’s largest and most active.
Here at CIBC Mellon we are committed to continuous improvement, which means working across industry groups, with regulators and with clients to further strengthen market practices, and providing our clients with the tools, controls and information they need to make securities lending program decisions that are right for them.