Dublin
29 October 2013
One large fine made an impression, but not enough to put off the creation of a new Citi desk in Dublin. SLT takes a look at securities lending in Ireland
Image: Shutterstock
The Irish stock exchange describes on its website the usual benefits of securities lending to a country: increased liquidity in Irish securities; the facilitator of timely settlement; and an enhancement to the trading strategies and opportunities available in Irish securities.
And while the practice suffered a blow to its perception with the Aviva case, there has been some good news to come out of the country.
Citi decided to open a securities lending trading desk in Dublin in November 2012, as it expanded its OpenLend capabilities in key cities and regions around the world.
The new desk formed part of an expanded Europe, Middle-East and Africa (EMEA) securities lending trading team, covering global equity lending, global fixed income lending and multi-currency reinvestment.
Gareth Mitchell, EMEA head of securities finance trading, who ran the London EMEA trading desk, was drawn in to also manage the new Dublin venture.
David Martocci, global head of securities finance at Citi, said at the time: 鈥淏y expanding our existing OpenLend capabilities to include a securities lending trading desk in Dublin, we are leveraging the importance of Ireland as a centre of excellence for financial services.鈥�
鈥淲e look forward to continuing to provide customised securities lending solutions to our clients that draw upon our global network and trading expertise across all asset classes. The addition of this new trading desk will add significant value to our already successful securities and fund services franchise in Ireland.鈥�
鈥淲e announced the opening of the desk in November 2012, but the first trader actually started eight months prior to that, in March 2012,鈥� says Gareth Mitchell.
鈥淚 moved over from the London trading desk in July of that same year, and now run both desks from Dublin. It is very much one trading desk in two locations鈥攐ne dealer board, one phone system鈥攕o we can cover each-other from both locations.鈥�
Mitchell attributes existing operational teams in Dublin as reason for setting up a desk there.
鈥淔or many years we have had our operations team in Dublin, with expanding product relationship management and sales teams, and in 2011, also moved our middle office from London to Dublin. It made sense to have at least a few traders in Dublin, which allowed them to be much closer to our middle office, and it also allowed us to leverage some of the talent pool that was already here.鈥�
A well-rounded growth
鈥淭here are many different types of lenders in Ireland鈥攑robably not dissimilar to any other European country involved in the practice,鈥� says Mitchell.
鈥淚n Ireland, insurance companies and funds have been involved in lending for many years, and I have been coming over here and talking to clients since the late nineties.鈥�
鈥淭he rest of Europe, if not the world, took a downturn after the crisis鈥攂ut is now almost back to where it was before in terms of volumes. I think Ireland in that way is not very different. Obviously regarding scale, some of the funds aren鈥檛 as big as the European funds, but they are just as active and some of the insurance companies here are extremely active as well.鈥�
As to whether more players will come into the scene鈥擬itchell notes that the majority of the larger funds or insurance companies are already active in securities lending. 鈥淚 don鈥檛 know of that many out there that aren鈥檛, so I don鈥檛 necessarily see any more firms joining the market right now.鈥�
There is one firm that has bowed out of its lending programme, however.
In December of 2012, the Irish central bank fined insurance firm Aviva 鈧�2.45 million because it failed to properly check and control its securities lending programme.
Two fines of 鈧�1.225 million each were handed down to separate Aviva subsidiaries鈥擜viva Insurance Europe and Aviva Life & Pensions Ireland鈥攔eportedly the fifth largest fine that the central bank has ever issued.
The central bank鈥檚 insurance directorate discovered regulatory breaches in the Aviva subsidiaries鈥� securities lending programmes when it conducted a survey into insurance companies鈥� use of liquidity swaps.
Aviva Insurance Europe and Aviva Life & Pensions Ireland entered into an investment management agreement with Aviva Investors Ireland鈥攁nother subsidiary鈥攊n November 2000.
This agreement was amended in 2002, allowing Aviva Investors Ireland to outsource securities lending to a different subsidiary, Aviva Investors Global Services.
In June 2010, a novation occurred and the rights of Aviva Investors Ireland under the agreement transferred to Aviva Investors Global Services, and the subsidiary continued to perform securities lending on behalf of Aviva Insurance Europe and Aviva Life & Pensions Ireland.
Between 2004 and 2012, the central bank found evidence that the firms failed to properly monitor and control securities lending that was carried out on their behalf, and that they did not review the adequacy of their overall investment policies.
It also found that the firms did not set risk limits in their securities lending programmes, or receive regular information on asset exposures and the risks that are associated with the practice.
In a joint statement at the time, the central bank鈥檚 director of credit institutions and insurance supervision, Fiona Muldoon, and director of enforcement, Peter Oakes, said: 鈥淲here a firm outsources investment activity, it must ensure that it has adequate investment policies, procedures and quantitative parameters to manage that investment activity in a way that is appropriate to the firm鈥檚 balance sheet, and that it has sufficient information to allow it to properly monitor and control that activity.
鈥淚t is inadequate and unacceptable for firms to rely on group controls or group limits. The central bank reminds firms that they remain responsible for all regulatory obligations notwithstanding any reliance upon group controls or group limits.鈥�
In a statement, Aviva reportedly said that it accepted the central bank鈥檚 findings and promptly rectified identified regulatory breaches, adding that none of the breaches affected its clients.
The Aviva subsidiaries shelved their securities lending programmes after the problems were identified.
However, despite the bad publicity that the case brought, Mitchell asserts that there was no slowdown or pull back due to the event. It seems that firms with the confidence and knowledge of their programmes are continuing on unabated鈥攚hile those that didn鈥檛 are licking their sore paws.
And while the practice suffered a blow to its perception with the Aviva case, there has been some good news to come out of the country.
Citi decided to open a securities lending trading desk in Dublin in November 2012, as it expanded its OpenLend capabilities in key cities and regions around the world.
The new desk formed part of an expanded Europe, Middle-East and Africa (EMEA) securities lending trading team, covering global equity lending, global fixed income lending and multi-currency reinvestment.
Gareth Mitchell, EMEA head of securities finance trading, who ran the London EMEA trading desk, was drawn in to also manage the new Dublin venture.
David Martocci, global head of securities finance at Citi, said at the time: 鈥淏y expanding our existing OpenLend capabilities to include a securities lending trading desk in Dublin, we are leveraging the importance of Ireland as a centre of excellence for financial services.鈥�
鈥淲e look forward to continuing to provide customised securities lending solutions to our clients that draw upon our global network and trading expertise across all asset classes. The addition of this new trading desk will add significant value to our already successful securities and fund services franchise in Ireland.鈥�
鈥淲e announced the opening of the desk in November 2012, but the first trader actually started eight months prior to that, in March 2012,鈥� says Gareth Mitchell.
鈥淚 moved over from the London trading desk in July of that same year, and now run both desks from Dublin. It is very much one trading desk in two locations鈥攐ne dealer board, one phone system鈥攕o we can cover each-other from both locations.鈥�
Mitchell attributes existing operational teams in Dublin as reason for setting up a desk there.
鈥淔or many years we have had our operations team in Dublin, with expanding product relationship management and sales teams, and in 2011, also moved our middle office from London to Dublin. It made sense to have at least a few traders in Dublin, which allowed them to be much closer to our middle office, and it also allowed us to leverage some of the talent pool that was already here.鈥�
A well-rounded growth
鈥淭here are many different types of lenders in Ireland鈥攑robably not dissimilar to any other European country involved in the practice,鈥� says Mitchell.
鈥淚n Ireland, insurance companies and funds have been involved in lending for many years, and I have been coming over here and talking to clients since the late nineties.鈥�
鈥淭he rest of Europe, if not the world, took a downturn after the crisis鈥攂ut is now almost back to where it was before in terms of volumes. I think Ireland in that way is not very different. Obviously regarding scale, some of the funds aren鈥檛 as big as the European funds, but they are just as active and some of the insurance companies here are extremely active as well.鈥�
As to whether more players will come into the scene鈥擬itchell notes that the majority of the larger funds or insurance companies are already active in securities lending. 鈥淚 don鈥檛 know of that many out there that aren鈥檛, so I don鈥檛 necessarily see any more firms joining the market right now.鈥�
There is one firm that has bowed out of its lending programme, however.
In December of 2012, the Irish central bank fined insurance firm Aviva 鈧�2.45 million because it failed to properly check and control its securities lending programme.
Two fines of 鈧�1.225 million each were handed down to separate Aviva subsidiaries鈥擜viva Insurance Europe and Aviva Life & Pensions Ireland鈥攔eportedly the fifth largest fine that the central bank has ever issued.
The central bank鈥檚 insurance directorate discovered regulatory breaches in the Aviva subsidiaries鈥� securities lending programmes when it conducted a survey into insurance companies鈥� use of liquidity swaps.
Aviva Insurance Europe and Aviva Life & Pensions Ireland entered into an investment management agreement with Aviva Investors Ireland鈥攁nother subsidiary鈥攊n November 2000.
This agreement was amended in 2002, allowing Aviva Investors Ireland to outsource securities lending to a different subsidiary, Aviva Investors Global Services.
In June 2010, a novation occurred and the rights of Aviva Investors Ireland under the agreement transferred to Aviva Investors Global Services, and the subsidiary continued to perform securities lending on behalf of Aviva Insurance Europe and Aviva Life & Pensions Ireland.
Between 2004 and 2012, the central bank found evidence that the firms failed to properly monitor and control securities lending that was carried out on their behalf, and that they did not review the adequacy of their overall investment policies.
It also found that the firms did not set risk limits in their securities lending programmes, or receive regular information on asset exposures and the risks that are associated with the practice.
In a joint statement at the time, the central bank鈥檚 director of credit institutions and insurance supervision, Fiona Muldoon, and director of enforcement, Peter Oakes, said: 鈥淲here a firm outsources investment activity, it must ensure that it has adequate investment policies, procedures and quantitative parameters to manage that investment activity in a way that is appropriate to the firm鈥檚 balance sheet, and that it has sufficient information to allow it to properly monitor and control that activity.
鈥淚t is inadequate and unacceptable for firms to rely on group controls or group limits. The central bank reminds firms that they remain responsible for all regulatory obligations notwithstanding any reliance upon group controls or group limits.鈥�
In a statement, Aviva reportedly said that it accepted the central bank鈥檚 findings and promptly rectified identified regulatory breaches, adding that none of the breaches affected its clients.
The Aviva subsidiaries shelved their securities lending programmes after the problems were identified.
However, despite the bad publicity that the case brought, Mitchell asserts that there was no slowdown or pull back due to the event. It seems that firms with the confidence and knowledge of their programmes are continuing on unabated鈥攚hile those that didn鈥檛 are licking their sore paws.
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