Nordics lenders new and old boost stock loan market, says SEB prime broker; PBs still in transition

More Nordic securities lenders are returning to the market and will find ongoing changes and new models in both prime brokerage and hedge funds, according to SEB Enskilda’s head of prime brokerage.

Magnus Ward, speaking to GSL.tv from the Swedish bank’s London office, explained that first-time participants are joining lenders who had stopped their programmes during last year’s turmoil as they return to the market.

“There were a lot of lenders that were part of the market that withdrew and have then come back again but there are also a lot of new lenders considering securities lending.

“Some really bad news last year was good news for some, as it opened their eyes to this as a potential income source - for them to lend their equities, particularly those who run more beta or index mandates,” he said. “It’s becoming more normal to split a portfolio between the alpha part and the beta part.”

Such a rate of change is reflected in the stock borrow space, where some prime brokers are altering their service set up, driven mainly by new demands by hedge funds looking for growth and security as the markets ascend.

In particular, it has led to a rise in the convergence between prime brokerage – the historical destination for much of hedge fund cash and securities – and custody, which would provide segregated safekeeping of assets to diffuse the risk of loss in the case of broker default.

Ward explained that this model came into demand about four years ago when hedge funds were exposed to “full risk from leaving assets with their prime broker. People started asking questions: ‘why should I have that risk on the prime brokers?’”

He adds that SEB runs prime brokerage on a purely custody model, where the clients’ assets are always in segregated accounts from the bank’s assets.

“A lot of our competitors are going in that direction - we see announcements from prime brokers that they are changing their models – [changing] to some kind of custody based model to give that extra security to hedge funds and their investors.”

Ward believes that Swedish lenders have been more wary than some countries in engaging in securities lending based on the negative press that short selling attracted as they apparently drove down the share price of domestic companies.

He added, however, that some lenders were still willing to lend international securities.

Separately from the video, he told GSL that there would be a flight to quality for investors into hedge funds. "Most money is wil be going into well-established hedge funds - most investors will want to find the right returns."

This means further pressure on start-up funds, whose numbers have declined in the last few years, with an additional challenge, says Ward, to go from USD25 million - USD 50 million up to the USD100- USD150 million mark.