the Nordics
05 March 2019
While the Nordics have faced some challenges over the years, industry experts expect new entrants to enter the Nordics securities lending marketplace, which could provide the region with opportunities
Image: Shutterstock
Despite a few challenges over the past few years, there is light at the end of the tunnel for the Nordics. New entrants are now entering the Nordics securities lending marketplace following a somewhat stagnant period. And, while challenges in equity lending are still ongoing, improvement and progress is being made, and there has been year on year (YoY) growth in this particular space. Further challenges revolve around regulation, the complex Securities Financing Transactions Regulation (SFTR), and Brexit uncertainty.
Data gathered by IHS Markit shows that Nordic equity lending revenues grew 21 percent YoY in 2018 as it came in at just over $270 million, however, this is still 30 percent lower than 2016 due to lower average fees. Regionally in the Nordics for 2018, Sweden had $271 million (+21 percent) in equity lending revenue, Norway had $97.8 million (-17 percent), while Finland had $78.8 million (+32 percent), and Denmark $27.6 million (+18 percent).
Paul Wilson, global head of IHS Markit, securities finance, said: 鈥淭he overall trend has been positive over the last year, with 2018 average loan balances reaching the highest levels since at least 2008.鈥�
Wilson added: 鈥淭here is some cause for optimism regarding lending fees, as average fees for Sweden, the largest Nordic market, were higher in Q4 thanks to an increased demand for specials. With demand robust and revenues trending higher, there is cause for optimism for securities lending in the Nordic region coming into 2019.鈥�
Nordic equity delivered Q1 2018 revenue of $60 million, up 12 percent as compared with Q1 2019. In terms of whether or not Q1 2019 will see this similar increase, Wilson predicted a positive outlook for Q1 based on January鈥檚 results; January revenues for Sweden were up an astounding 136 percent compared to January 2017 due to higher fees.
Relative to January 2017, Denmark underperformed the most, says Wilson, with revenues down 50 percent, caused by loan balances and fees both declining by more than 20 percent. Wilson highlighted that given the significance of Sweden to the overall returns for the region, the upswing in fees augur well for Q1 revenues.
Bo Thulin, country manager for Nordics at Northern Trust, affirmed: 鈥淨1 2019 has started with good revenues once again, mainly supported by specials demand in the key Nordic market, Sweden. In the retail sector, investors remain concerned about the longer-term outlook and broader structural trends, such as the shift to online shopping. Retailers continue to struggle with competition from big online competitors, declining foot traffic, burdensome rents and heavy debt loads.鈥�
Also discussing the securities lending industry in the Nordics, Simon Lee, managing director of business development, Europe, the Middle East, Africa and the Asia Pacific, eSecLending, said: 鈥淐onsistent with other fund centres we are starting to see new entrants to the securities lending marketplace, firms that are either lending for the first time, or re-entering after a hiatus, often stretching back to the financial crisis in 2008. Over the coming years, we would expect to see a continued increase in market participation from beneficial owners, together with the attendant growth in lendable assets associated.鈥�
鈥淲hether this has a longer-term dilutive effect on individual lender performance remains to be seen, though as is often the case, the market evolves and identifies new opportunities that may offset any decline from lending in new markets to enhanced operational efficiencies through automation.鈥�
Increasing Interest
As noted, new entrants in the marketplace are bringing opportunities to the Nordics securities finance space. Lee commented: 鈥淣ew entrants to the marketplace bring new lendable supply, with those lender鈥檚 portfolios naturally having more exposure to not only the Nordic markets but also other higher margin markets in Eastern Europe such as the Czech Republic, Poland, and Russia.鈥�
鈥淚n addition, we are seeing the more engaged Nordic lenders following similar paths to lenders in other jurisdictions. They are adapting their programmes to enhance performance in consideration of the evolving regulatory environment and the effect that has on borrower demand. This may take the form of expanding acceptable collateral schedules, engaging with new borrowing counterparties, or accessing additional routes to market through alternative providers, and through principal, exclusive, and peer-to-peer trade structures.鈥�
Wilson commented: 鈥淲e are observing continued interest from Nordic beneficial owners, looking to review their securities lending strategies. Those not currently lending are considering dipping their toe in for the first time. There鈥檚 focus around oversight and control, monitoring lending activity and an increasing interest in trying to understand and quantify risk.鈥�
鈥淲hile most are in lending programmes that are indemnified, having an independent statistical measure of risk alongside the income appears to be getting more attention. Additionally, we also have seen some interest in looking at methodologies to help support the firm鈥檚 requirement of best execution under the second Markets in Financial Instruments Directive.鈥�
Discussing increasing interest on Northern Trust鈥檚 lending programme, Thulin said: 鈥淲e continue to see new clients join our securities lending programme and we are working with our existing lenders to expand their parameters through a thoughtful, risk-adjusted approach, whether that is reviewing borrowers, lending limits, collateral requirements or adding new lendable assets and trade structures to their programmes.鈥�
Thulin continued: 鈥淭he Nordic region has continued to perform well trading-wise in a period of market volatility. We have seen the demand dynamic in this environment evolve, with conditions more suitable to quantitative strategy activity.鈥�
鈥淭he algorithmic-based trading models are better suited to periods of increased market volatility and helped support lending volumes at a time that traditional fundamentals have found it more difficult to deploy capital on the short side. Short interest themes also changed and we have seen a reduction in demand for oil-related stocks, a sector the region has particular exposure to and the emergence of new themes in the retail and debt collection sectors.鈥�
From a fixed income viewpoint, Thulin explained that balances have remained broadly stable, and largely centre on the high-quality sovereign debt the region has to offer, in addition to supranational and government agency issuance.
Thulin observed: 鈥淧ockets of demand are evident for general collateral bonds, but there are few issues, government or credit, trading with any notable special value. In the Nordic region, we often find that local borrowers prefer the certainty and ease of facing a predetermined client in either an exclusive or sole-borrower arrangement.鈥�
Obstacles and opportunities
Regulatory challenges are an obstacle for most jurisdictions and the Nordics is no different. In particular, the complexity of SFTR and it鈥檚 upcoming implementation date is proving to be a challenge for most market participants.
Wilson cited: 鈥淚t starts with the creation of dissemination of unique transaction identifiers following the European Securities Markets Authority (ESMA) waterfall, continues with the gathering of the 155 data points required under the regulation鈥攊ncluding 96 of which need to match within strict tolerance settings鈥攁nd ends with the reporting to a trade repository of up to 32 reports requested in ISO 20022 format. All of this under a lightning T+1 reporting timeframe (S+1 for collateral).鈥�
鈥淲ithin the SFTR initiative, there are embedded considerations around Brexit with data having to be warehoused under the correct jurisdiction (UK or EU) by all the firms involved in the SFT reporting. We can see that all of the main trade repositories have set up entities across the Brexit divide to cover their clients鈥� requirements.鈥�
Meanwhile, Thulin remarked: 鈥淚n this regulatory focused environment, regulatory and capital efficient lending structures are becoming even more important in driving loan balance. Clients who are viewed favourably in this regard are well placed to benefit from more bespoke, segregated, lending opportunities.鈥�
Sweden鈥檚 not so secret sauce
Sweden still stands ahead of other Nordic countries in terms of securities lending and Wilson noted that there is no secret sauce to this. Wilson asserted: 鈥淪weden equity lending revenues were 57 percent of the regional total in 2018, the highest contribution percentage recorded, up from 53 percent from 2017. There is no secret sauce to this鈥攖he Swedish equity and fixed income market is broader and more liquid than other markets, hence the probability of opportunity is greater. That being said, the increase in specials demand in stocks, such as Intrum, Mycronic and H&M, is expanding Sweden鈥檚 lead in revenue generation.鈥�
Thulin added: 鈥淪weden is one of the largest and most established of the four Nordic markets and as a result less concentrated to particular demand themes. We have seen demand fluctuate in oil-related names recently, with Finland and Norway, in particular, having higher exposure to this sector. Sweden has benefitted from some key demand themes over recent times, in particular, the retail, biometric and debt collection sectors.鈥�
An automated outlook
Technological advancements in the Nordics鈥� securities finance space have an automation focus. Indeed, automated trading platforms are expected to play a key role in the industry. Thulin says: 鈥淭echnology continues to represent an important tool in optimising the delivery of the product, and we expect the Nordics to be no exception to this. Growth in quantitative-based trading strategies is changing the ways in which borrowers and lenders are consuming, pricing and executing securities lending transactions.鈥�
Thulin added: 鈥淎utomated trading platforms, such as Equilend鈥檚 Next Generation Trading (NGT) will play a key role in this evolution as the industry works to add efficiencies and scalability. We expect the Nordic securities finance industry to continue to focus on environmental social and governance and corporate governance. The requirements of SFTR are a key area of attention for the industry and Northern Trust will be supporting our clients to ensure their securities lending transactions are reported under this regulation.鈥�
From an IHS Markit perspective, Wilson said that the area they getting the most focus has been an increased desire for more detailed information regarding lending fees, particularly transaction level and intra-day data.
According to Wilson, this is a general trend that IHS Markit is seeing across the securities finance space globally, as firms look to identify market trends, securities and re-rate opportunities in a timely, efficient manner.
Additionally, with elevated demand for Nordic equities, the focus on extracting value from lendable portfolios is increasing, Wilson revealed.
Looking at the securities finance industry in the Nordics over the next five years, Wilson said he anticipates an increase in Nordic-based beneficial owners participating in securities lending.
He commented: 鈥淭here will be no dramatic increase, more a general gradual increase over the next few years. Performance and cost pressures should drive more beneficial owners to weigh up and evaluate the value of potential income opportunities. On the flip side, as has been noted more broadly across Europe, SFTR and its increased costs could lead some smaller beneficial owners to stop lending.鈥�
2018 Nordic region equity lending revenue summary:
* Data from IHS Markit
Data gathered by IHS Markit shows that Nordic equity lending revenues grew 21 percent YoY in 2018 as it came in at just over $270 million, however, this is still 30 percent lower than 2016 due to lower average fees. Regionally in the Nordics for 2018, Sweden had $271 million (+21 percent) in equity lending revenue, Norway had $97.8 million (-17 percent), while Finland had $78.8 million (+32 percent), and Denmark $27.6 million (+18 percent).
Paul Wilson, global head of IHS Markit, securities finance, said: 鈥淭he overall trend has been positive over the last year, with 2018 average loan balances reaching the highest levels since at least 2008.鈥�
Wilson added: 鈥淭here is some cause for optimism regarding lending fees, as average fees for Sweden, the largest Nordic market, were higher in Q4 thanks to an increased demand for specials. With demand robust and revenues trending higher, there is cause for optimism for securities lending in the Nordic region coming into 2019.鈥�
Nordic equity delivered Q1 2018 revenue of $60 million, up 12 percent as compared with Q1 2019. In terms of whether or not Q1 2019 will see this similar increase, Wilson predicted a positive outlook for Q1 based on January鈥檚 results; January revenues for Sweden were up an astounding 136 percent compared to January 2017 due to higher fees.
Relative to January 2017, Denmark underperformed the most, says Wilson, with revenues down 50 percent, caused by loan balances and fees both declining by more than 20 percent. Wilson highlighted that given the significance of Sweden to the overall returns for the region, the upswing in fees augur well for Q1 revenues.
Bo Thulin, country manager for Nordics at Northern Trust, affirmed: 鈥淨1 2019 has started with good revenues once again, mainly supported by specials demand in the key Nordic market, Sweden. In the retail sector, investors remain concerned about the longer-term outlook and broader structural trends, such as the shift to online shopping. Retailers continue to struggle with competition from big online competitors, declining foot traffic, burdensome rents and heavy debt loads.鈥�
Also discussing the securities lending industry in the Nordics, Simon Lee, managing director of business development, Europe, the Middle East, Africa and the Asia Pacific, eSecLending, said: 鈥淐onsistent with other fund centres we are starting to see new entrants to the securities lending marketplace, firms that are either lending for the first time, or re-entering after a hiatus, often stretching back to the financial crisis in 2008. Over the coming years, we would expect to see a continued increase in market participation from beneficial owners, together with the attendant growth in lendable assets associated.鈥�
鈥淲hether this has a longer-term dilutive effect on individual lender performance remains to be seen, though as is often the case, the market evolves and identifies new opportunities that may offset any decline from lending in new markets to enhanced operational efficiencies through automation.鈥�
Increasing Interest
As noted, new entrants in the marketplace are bringing opportunities to the Nordics securities finance space. Lee commented: 鈥淣ew entrants to the marketplace bring new lendable supply, with those lender鈥檚 portfolios naturally having more exposure to not only the Nordic markets but also other higher margin markets in Eastern Europe such as the Czech Republic, Poland, and Russia.鈥�
鈥淚n addition, we are seeing the more engaged Nordic lenders following similar paths to lenders in other jurisdictions. They are adapting their programmes to enhance performance in consideration of the evolving regulatory environment and the effect that has on borrower demand. This may take the form of expanding acceptable collateral schedules, engaging with new borrowing counterparties, or accessing additional routes to market through alternative providers, and through principal, exclusive, and peer-to-peer trade structures.鈥�
Wilson commented: 鈥淲e are observing continued interest from Nordic beneficial owners, looking to review their securities lending strategies. Those not currently lending are considering dipping their toe in for the first time. There鈥檚 focus around oversight and control, monitoring lending activity and an increasing interest in trying to understand and quantify risk.鈥�
鈥淲hile most are in lending programmes that are indemnified, having an independent statistical measure of risk alongside the income appears to be getting more attention. Additionally, we also have seen some interest in looking at methodologies to help support the firm鈥檚 requirement of best execution under the second Markets in Financial Instruments Directive.鈥�
Discussing increasing interest on Northern Trust鈥檚 lending programme, Thulin said: 鈥淲e continue to see new clients join our securities lending programme and we are working with our existing lenders to expand their parameters through a thoughtful, risk-adjusted approach, whether that is reviewing borrowers, lending limits, collateral requirements or adding new lendable assets and trade structures to their programmes.鈥�
Thulin continued: 鈥淭he Nordic region has continued to perform well trading-wise in a period of market volatility. We have seen the demand dynamic in this environment evolve, with conditions more suitable to quantitative strategy activity.鈥�
鈥淭he algorithmic-based trading models are better suited to periods of increased market volatility and helped support lending volumes at a time that traditional fundamentals have found it more difficult to deploy capital on the short side. Short interest themes also changed and we have seen a reduction in demand for oil-related stocks, a sector the region has particular exposure to and the emergence of new themes in the retail and debt collection sectors.鈥�
From a fixed income viewpoint, Thulin explained that balances have remained broadly stable, and largely centre on the high-quality sovereign debt the region has to offer, in addition to supranational and government agency issuance.
Thulin observed: 鈥淧ockets of demand are evident for general collateral bonds, but there are few issues, government or credit, trading with any notable special value. In the Nordic region, we often find that local borrowers prefer the certainty and ease of facing a predetermined client in either an exclusive or sole-borrower arrangement.鈥�
Obstacles and opportunities
Regulatory challenges are an obstacle for most jurisdictions and the Nordics is no different. In particular, the complexity of SFTR and it鈥檚 upcoming implementation date is proving to be a challenge for most market participants.
Wilson cited: 鈥淚t starts with the creation of dissemination of unique transaction identifiers following the European Securities Markets Authority (ESMA) waterfall, continues with the gathering of the 155 data points required under the regulation鈥攊ncluding 96 of which need to match within strict tolerance settings鈥攁nd ends with the reporting to a trade repository of up to 32 reports requested in ISO 20022 format. All of this under a lightning T+1 reporting timeframe (S+1 for collateral).鈥�
鈥淲ithin the SFTR initiative, there are embedded considerations around Brexit with data having to be warehoused under the correct jurisdiction (UK or EU) by all the firms involved in the SFT reporting. We can see that all of the main trade repositories have set up entities across the Brexit divide to cover their clients鈥� requirements.鈥�
Meanwhile, Thulin remarked: 鈥淚n this regulatory focused environment, regulatory and capital efficient lending structures are becoming even more important in driving loan balance. Clients who are viewed favourably in this regard are well placed to benefit from more bespoke, segregated, lending opportunities.鈥�
Sweden鈥檚 not so secret sauce
Sweden still stands ahead of other Nordic countries in terms of securities lending and Wilson noted that there is no secret sauce to this. Wilson asserted: 鈥淪weden equity lending revenues were 57 percent of the regional total in 2018, the highest contribution percentage recorded, up from 53 percent from 2017. There is no secret sauce to this鈥攖he Swedish equity and fixed income market is broader and more liquid than other markets, hence the probability of opportunity is greater. That being said, the increase in specials demand in stocks, such as Intrum, Mycronic and H&M, is expanding Sweden鈥檚 lead in revenue generation.鈥�
Thulin added: 鈥淪weden is one of the largest and most established of the four Nordic markets and as a result less concentrated to particular demand themes. We have seen demand fluctuate in oil-related names recently, with Finland and Norway, in particular, having higher exposure to this sector. Sweden has benefitted from some key demand themes over recent times, in particular, the retail, biometric and debt collection sectors.鈥�
An automated outlook
Technological advancements in the Nordics鈥� securities finance space have an automation focus. Indeed, automated trading platforms are expected to play a key role in the industry. Thulin says: 鈥淭echnology continues to represent an important tool in optimising the delivery of the product, and we expect the Nordics to be no exception to this. Growth in quantitative-based trading strategies is changing the ways in which borrowers and lenders are consuming, pricing and executing securities lending transactions.鈥�
Thulin added: 鈥淎utomated trading platforms, such as Equilend鈥檚 Next Generation Trading (NGT) will play a key role in this evolution as the industry works to add efficiencies and scalability. We expect the Nordic securities finance industry to continue to focus on environmental social and governance and corporate governance. The requirements of SFTR are a key area of attention for the industry and Northern Trust will be supporting our clients to ensure their securities lending transactions are reported under this regulation.鈥�
From an IHS Markit perspective, Wilson said that the area they getting the most focus has been an increased desire for more detailed information regarding lending fees, particularly transaction level and intra-day data.
According to Wilson, this is a general trend that IHS Markit is seeing across the securities finance space globally, as firms look to identify market trends, securities and re-rate opportunities in a timely, efficient manner.
Additionally, with elevated demand for Nordic equities, the focus on extracting value from lendable portfolios is increasing, Wilson revealed.
Looking at the securities finance industry in the Nordics over the next five years, Wilson said he anticipates an increase in Nordic-based beneficial owners participating in securities lending.
He commented: 鈥淭here will be no dramatic increase, more a general gradual increase over the next few years. Performance and cost pressures should drive more beneficial owners to weigh up and evaluate the value of potential income opportunities. On the flip side, as has been noted more broadly across Europe, SFTR and its increased costs could lead some smaller beneficial owners to stop lending.鈥�
2018 Nordic region equity lending revenue summary:
- Sweden $271million (+21%)
- Norway $97.8 million (-17%)
- Finland $78.8 million (+32%)
- Denmark $27.6 million (+18%)
* Data from IHS Markit
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