Agenda Item 8 – Appendix A
BNP Paribas Securities Services Securities lending for Middlesbrough Borough Council re. Teesside Pension Fund (“Teesside”)
Introduction
As a well-established financial practice, securities lending has become an essential tool in the efficient management of an institution’s balance sheet, offering asset owners the opportunity to generate incremental revenue on a portfolio. As a result, such transactions are widely considered an important and integral part of a fund’s efficient portfolio management and provide the wider market with better liquidity, improved settlement and, closer bid/offer trading spreads for investors and beneficial owners alike.
Our securities lending activity sits within the Market and Financing Services (MFS) division of BNP Paribas Securities Services. The MFS trading activities include a full suite of financing services. Our securities financing programmes lend both equity and fixed income securities using either securities lending or repurchase (repo) trade structures and we have been offering securities lending services for over 20 years to our clients, globally.
We offer both agency and principal routes to market on either a custodial or third party basis, each tailored to suit individual client needs, as opposed to a 'one size fits all' approach.
Importantly, this flexibility means clients in our agency programme can choose which forms of collateral they wish to accept, the acceptable list of approved borrowers and any additional bespoke programme parameters they wish to apply.
At BNP Paribas Securities Services, we have an excellent track record of operating risk-averse, commercially-orientated securities lending programmes for our clients. We believe that our success within the industry and with our clients is in the way we differentiate our product and service from our peers.
Our proposal
Following an in-depth analysis of the Teesside portfolios in custody with BNP Paribas Securities Services, we propose that Teesside considers joining our Indemnified Agency Securities Lending programme, and permits the lending of its securities, on a fully collateralised basis, to a range selected borrowers approved within the programme. Projected one year revenue estimate and assumptions
Our initial analysis of revenue potential was completed in December 2015, where we estimated gross revenues of GBP 527,000 could be achieved.
We have reviewed the same portfolio more recently in May 2016 and, based on the same programme assumptions, we have concluded that the revenue potential for Teesside remains strong and in line with our earlier projections. Any material change to the holdings, however, could impact achievable revenues.
We assumed that all positions would be available for lending, with no recalling for voting.
We have assumed that Teesside will elect to receive cash on all SCRIP dividend announcements.
We assumed that Teesside would accept the BNP Paribas full list of indemnified borrowers, as detailed at the back of this document, in “Appendix 1”.
We have applied the limit set out in the LGPS (Management and Investment of Funds) Regulations, 2009, and have therefore restricted the on-loan balance to a maximum of 25% of the total fund NAV.
Our estimate projection assumes the acceptance by Teesside of our indemnified non-cash collateral profile, as detailed in “Appendix 2”.
All equity revenues have been calculated using the withholding tax rate position in each market, outlined in “Appendix 3”.
Under our agency programme, securities lending revenues are shared between each client and us, as agent, in a pre-agreed percentage split. Fee arrangements are negotiated following a detailed discussion with each client, taking into consideration any lending parameters; including term of trade and prevailing market demand for particular assets and the accepted collateral parameters. A detailed understanding of all related factors enables us to offer a very compelling fee arrangement.
Under an optimal set of parameters and for the right portfolio of assets, we structure programmes with our clients that best suit the level of return they are seeking through various fee arrangements, including fixed guarantees, minimum floors or tiered fee splits.
Our leading position in the European markets is demonstrated by our strong utilisation rates and our return to lendable performance. As one of the largest financial organisations in Europe offering both global and local custodian services we have extensive relationships with both international and local institutions. As such, a key differentiator of our position in the market is that we are able to tap the continuing demand we see to cover sell-side settlement shorts. This ensures demand for equity assets at the best price on a continuous as well as a seasonal basis.
While total returns are driven by collateral profile and underlying tax status, this added element provides a ready market for institutional investors holding assets. Product and service differentiators
The following key elements of our service offering illustrate where we believe our service differentiates us from that of our peers.
Broad product suite
We offer agency, principal and 3rd party lending & borrowing capabilities to our clients.
Robust risk management
• Holistic approach to risk management, systemically monitoring and managing exposures across all business lines of the group through ongoing VaR modelling – as oppose to siloed approach per business/product line.
• Our approach to risk management and counterparty approval and monitoring enables us to indemnify a broader scope of financial instruments than our peers.
• As a group we maintain a strong balance sheet and business franchise with a large depository base.
Programme growth and commitment
• We continue to make significant financial investment in our agency programme, expanding our product into the U.S market, increasing the size of our Pan-Asian trading capabilities based in Sydney and adding key business and product development hires to ours teams. To this end, our clients have directly benefited from the continual developments to our programme from both an IT and staff resource perspective, a commitment that is endorsed at the highest level of management in the bank.
We have recently enhanced our client reporting capabilities through our newly launched web- based platform, providing our clients with a fully transparent and intuitive suite of securities lending activity reports accessible through Neo-link.
Proven track record
Positive monthly returns, every month for each client. No client has ever suffered a loss in the history of our programme. Additionally, we have also never lost money across the group as our risk management approach and ethos is applied globally across all business lines.
Tailored approach
• We offer a fully tailored product and service to our agency clients aligning the requirements and expectations of each client with market demand, adding value for all new and existing lenders within our programme.
• We have access to multiple sources of market pricing and benchmarking, through agency, principal and industry wide benchmarking services, providing greater price discovery and transparency across our programmes and the industry.
Global coverage
• As a global banking group our clients benefit from an extensive local and global custody network that ensures loaned assets frequently remain within the bank’s network, reinforcing client asset protection.
Our programmes
Of paramount importance to us across our entire asset servicing activities is the safety of our clients’ assets. We aim to ensure the highest possible levels of client security by employing market leading controls, operational procedures and contractual safeguards – backed by one of the safest banking groups in the world.
At times of acute market stress we have demonstrated our ability to protect our clients’ interests by through our risk and trading expertise. As highly rated market counterparty, we have also ensured that client revenues have also been maintained while significantly increasing borrower collateral provision.
In the history of our securities lending programmes, no client has ever suffered a financial loss nor have we been subject to any lawsuits, legal claims or grievances. This is something of which we are very proud.
Our principal programme offers the benefit of extensive local expertise via its local trading desks and local custody business. This is reinforced on an international level with its trading relationships across the globe. We deal directly with local and international borrowers through a network of five trading desks, strategically located in the major European markets: London, Frankfurt, Milan, Madrid and Paris with a capacity to trade a range of securities from over 30 countries and we are a natural end user of European and Asian assets, ensuring we are competitive in our pricing.
Our global Systemically Important Financial Institution (g-SIFI) status, strong credit rating and a successful business line mix make us a partner of choice. With changes to the regulatory landscape bringing with them a shift in the appetite of demand; the need to reach more sources of demand is ever greater. When trading as principal we are able to use both securities lending and repo transactions to tap into the wider asset financing world, as well as using newer structures such as central counterparties (CCPs).
Our agency programme is designed to match the needs of our clients and this flexibility can be found right across our securities lending services. We regard flexibility as the key to meeting clients’ needs allowing them to tailor their programmes to match their risk/reward profiles.
We work closely with each client to ensure each securities lending programme is designed and tailored to a bespoke set of specifications, taking into consideration the trading strategy and volatility of the underlying portfolio of assets.
As a result, Teesside will be able to apply specific counterparty and portfolio level limits, as required and through our transparent on-line reporting, we will provide a series of periodic activity reports that satisfy Teesside’s compliance and information metrics.
Teesside’s programme will remain fully flexible and can be tailored to adapt to changing circumstances or market pressures accordingly.
Most importantly, our principal and agency businesses operate with absolute segregation and function independently of each other.
Risk Management
Preservation of capital is the foundation on which we have built and continue to grow our securities lending business. The values and practices we employ to monitor, control and report on the risks associated with managing a securities lending business, are adopted firm wide. Our risk management systems enable us to view all transactions and exposures by client and by counterparty, across multiple business and product lines. This provides our senior management teams with a business critical risk management tool that we believe is unique amongst our peers in the securities lending industry.
Our securities lending programmes help clients generate additional income within a low risk environment. We ensure operational, legal, credit, corporate action and collateral risks are robustly managed for optimal efficiency.
We use standard market legal documentation (Global Master Securities Lending Agreement – GMSLA) when contracting with the approved borrowers in our agency lending programme, which is recognised and accepted by all market participants within the securities lending market. We are also members of securities lending industry associations which allow us to be at the forefront of discussion and debate about changes that may be required to industry documentation.
Counterparty risk (clients, borrowers and counterparties)
Management of counterparty risk is carried out via our internal benchmark counterparty risk system. The main purpose of the system is to calculate and monitor counterparty exposure on an ongoing basis.
Our risk system calculates the exposures by estimating future market moves using a Monte Carlo simulation framework. Parameters taken into consideration include but are not limited to: asset volatility, correlation and counterparty rating (internal and external). All derived from historically observed market data. The Present Value (PV) of the assets associated to the market moves are calculated to maturity. When aggregating the transactions within a given basket or portfolio, the system takes into account the legal environment of the counterparty i.e. the master and collateral agreements.
New borrowers
The credit review process is the responsibility of Risk-IM (our Group’s Risk Investments and Markets division). It involves the whole risk department from the local analysts through to the Risk-IM department at BNP Paribas group level – which comprises of senior level management and expert credit analysts. New counterparts are first analysed and recommendations are made on a local basis and then submitted to the global committee for approval. Once this has been obtained, the global credit department allocates appropriate securities lending credit lines to the counterpart. As part of the approval process our Risk department pays our counterparties due diligence visits.
The allocated internal credit lines depend on comprehensive risk factor analysis including the counterparty’s rating and reputation. The quality and the amount of collateral to be received, the level of our global exposure to the country as well as the exposure to the client are also taken into consideration.
Existing borrowers
Following the initial credit approval there is an ongoing review of a borrower’s credentials which is managed by the Risk-IM department. The credit and risk committee is responsible for conducting a formal periodic review of all counterparts and the resulting report is reviewed at a senior credit committee meeting. Once the analysis has been carried out, a decision with regards to limits is taken and details of these meetings are sent out automatically to all business lines. The group’s internal credit system is immediately updated with any changes imposed.
Information regarding group exposure to individual counterparts is captured in this system and monitored on a continuous basis. Exposure limits are established for borrowers and amended at any time. Provided that there are no material changes to our credit opinion, each credit line is reviewed quarterly at the local level and then annually on a global level. Any material changes are addressed immediately.
Managing collateral
On behalf of Teesside securities lending activity, BNP Paribas Securities Services would manage all non-cash collateral accepted in exchange for securities on-loan, using an external, third-party collateral manager.
Where a tri-party Agent is used (Agents such as JP Morgan, BNY Mellon, Euroclear or Clearstream), Teesside (as principal to the Borrower) is added to the existing ESCROW agreement held and maintained at the tri-party Agent.
The Borrower pays all associated fees owed to the tri-party Agent for managing the collateral as this arrangement affords the Borrowers’ greater efficiency when managing multiple collateral requirements.
BNP Paribas Securities Services Agency lending calculates and instructs the tri-party collateral manager how much collateral and margin to transfer between the account of the Borrower and Teesside and, then monitors the manager ongoing to ensure that the correct level of margin is both taken from the Borrower and maintained throughout the life of the loan.
All loans are collateralised on a pre-paid basis, so collateral is received by Teesside before any outgoing securities loans are settled in the market with the borrower.
Indemnification
As part of our agency lending programme we would offer Teesside indemnification against an event of default of a counterparty ("borrower") backed by our long-term credit rating of A+ and, our g-SIFI status. As each loan is transacted on a fully collateralised basis, in practical terms the indemnity protects Teesside from a shortfall in collateral value against the value of loaned securities upon the default of a borrower. The agency lending programme has all the features Teesside would expect from a major custodian such as contractual income, activity reporting and a robust risk management framework.
Programme reporting
Our agency lending programme offers clients transparent and timely on-line reporting of lending activity with a robust risk management framework. We can provide a series of periodic reports that satisfy the compliance and information requests that any lender may have. These include outstanding loan reports, collateral that is allocated to the lender, as well as fee and billing reports – these are generated daily and can be delivered on a periodic basis as requested by the lender.
Our reports can be sent on a daily, weekly or monthly basis. In the event case you require us to set lending limits with borrowers, we will also send you a limits report showing outstanding loans values versus limit for each borrower.
Our securities lending reports are available through two primary mediums:
Data Navigation Analysis (‘DNA’)
DNA is our proprietary reporting platform. This on-line system contains the same data as our emailed reports but is additionally able to report from a historic viewpoint with analytic abilities. Data reflected in DNA can be exported to spreadsheet, create ad-hoc graphics and also generate shareable content to email onwards. Excel and email
The most common reporting medium currently being used across our client base is through email with Excel attachment(s). These can be secured by a password, if requested by the client. This form of reporting typically reflects previous close-of-business (COB) on a daily, weekly or monthly cycle. The reports are drawn from a robust standard library providing detailed information from detail to summary. Content of these standard reports includes trade level detail, counterparty exposure, fee and billing and collateralisation. Performance benchmark reporting
We submit our agency securities lending data to Markit Financial Information Services a leading independent provider of securities financing data and we utilise their reporting and benchmarking market data. This data allows us to analyse, compare and benchmark the securities lending performance at a programme and individual client level.
Performance indicators in respect to loan activity within our agency lending programme can be provided to every client and typically cover revenue, loan/trade data, collateral, system/reporting access, operational issues and compliance to programme parameters. Additionally, all revenues figures are benchmarked against widely accepted independent market references. Relationship management
Teesside would be assigned a dedicated Securities Lending Relationship Manager (“SLRM”), based in London, who will be the contact point for all product related communications. Your SLRM will be responsible for on-site visits, service reviews, daily emails and telephone interactions.
We would also be happy to provide you with additional dedicated contact personnel for specific functional management (e.g. front or back office) should you wish. In addition to these contact points we will also provide 24/7 on-line access to securities lending reporting.
In our experience, each client requires a variety of different contact mediums and frequencies of interaction and as such we would be happy to discuss your specific requirements in greater detail with you.
APPENDIX 1
INDEMNFIED BORROWERS Abbey National Treasury Services HSBC Securities (USA) Inc. ABN Amro Bank NV Industrial & Commercial Bank of China Financial Services LLC Bank of Nova Scotia (Asia) Limited ING Bank N.V London Branch Bank of Nova Scotia London Branch J P Morgan Securities Plc Bank of Scotland Plc Janney Montgomery Scott LLC Barclays Bank Plc Jefferies, LLC Barclays Capital Inc. JPMorgan Securities Inc. Barclays Capital Securities Limited Macquarie Bank Limited BMO Capital Markets Corp Macquarie Capital (USA) Inc. BNP Paribas Arbitrage Merril Lynch Pierce Fenner & Smith Inc. BNP Paribas London Branch Merrill Lynch International BNP Paribas Prime Brokerage Inc. Mitsubishi UFJ Securities International Plc BNP Paribas Securities Corp Mizuho Securities USA Inc BNP Paribas Securities Services Morgan Stanley & Co International Plc Citigroup Global Markets Inc Morgan Stanley & Co. LLC Citigroup Global Markets Limited Morgan Stanley Securities Limited Commerzbank AG Natixis SA Commerzbank AG London Branch Natixis Securities Americas, LLC COMMERZBANK AKTIENGESELLSCHAFT Newedge USA, LLC Credit Agricole Securities (USA) Inc. Nomura International Plc Credit Suisse Securities (Europe) Limited Nomura Securities International, Inc Credit Suisse Securities USA LLC RBC Capital Markets Corp. Deutsche Bank AG RBS Securities, Inc. Deutsche Bank AG London Branch Royal Bank of Scotland Group Plc Deutsche Bank Securities Inc Scotia Capital (USA) Inc. Fidelity Brokerage Services LLC SG Americas Securities, LLC Fortis Bank (Nederland) N.V Societe Generale Goldman Sachs & Co UBS Limited Goldman Sachs International UBS Securities LLC Guggenheim Securities, LLC Unicredit AG HSBC Bank Plc
APPENDIX 2 COLLATERAL POLICY
EQUITY Country Major Index Name Country Major Index Name Austria ATX 20 Switzerland SMI 20 Belgium BEL 20 SMI Mid BEL Mid Index UK FTSE 100 Denmark OMX 20 FTSE 250 Europe Eurostoxx 50 Canada S&P TSX 60 Finland OMXH 25 US S&P 500 France CAC 40 NASDAQ 100 CAC All Tradeable Russell 1000 CAC NEXT 20 Russell 2000 SBF 120 S&P 400 Midcap Germany DAX 30 Australia ASX 50 MDAX ASX 200 TecDAX Hong Kong HSI Ireland ISEQ 20 Hang Seng China Enterprise Index (HSCEI) Italy FTSE MIB 40 Hang Seng Composite FTSE Mid-cap Japan NIKKEI 225 Luxembourg LuxX Index NIKKEI 400 Netherlands AEX 25 TOPIX 100 AMX TOPIX 500 Norway OBX 25 New Zealand NZSE 10 OBX All Share Index Singapore STI 30 Poland WIG 20 South Korea KOSPI 50 Portugal PSI 20 KOSPI 200 Spain IBEX 35 Taiwan FTSE TWSE Taiwan 50 Sweden OMX Stockholm 30
FIXED INCOME FIXED INCOME Corporate bonds Supranational bonds: African Development Bank Asian Development Bank Markets: Corporacion Andina de Fomento -Europe; UK, FR, DE, NL, AT, CH, LU, BE, FI, DK, SE, NO, IT & ES Council of Europe Development Bank -North America; US & CA European Bank for Reconstruction and Development -APAC; JP, AU & NZ European Community Conditions: European Investment Bank (EIB) - minimum rating B/B2 European Financial Stability Facility - minimum issue size = EUR 200m (or equiv.) Inter American Development Bank - plain vanilla (no strips, callable, perpetual, sinking fund and structured International Bank for Reconstruction and Development notes)and traded within previous two weeks International Finance Corporation Nordik Investment Bank Government bonds Public agency bonds Caisee d'amortissement de la dette sociale (CADES) Markets: SFEF -Europe; UK, FR, DE, NL, AT, CH, LU, BE, FI, DK, SE, NO, IT, ES, PT & IE Regie Autonome des Transports Parisiens (RATP) -North America; US & CA Reseau Ferre de France Unedic -APAC; JP, AU & NZ BNG (Netherlands)
Covered bonds US agency bonds Markets: Federal National Mortgage Association (FNMA) -Europe; UK, FR, DE, NL, AT, CH, FI, DK, SE, NO Federal Home Loan Mortgage Corporation (FHLMC) -North America; CA Federal Hime Loan Bank (FHLB) Conditions: Federal Fram Credit Banks (FFCB) - AAA rated Plain pass-through MBS issued by FNMA, FHLMC and GNMA (Government - minimum issue size EUR 1bn (or equiv.) National Mortgage Association)
EXCHANGE TRADED FUNDS (ETFs) Country Name Country Name Austria MSCI Austria Sweden MSCI Sweden ATX 20 OMX Stockholm 30 Belgium MSCI Belgium Switzerland MSCI Switzerland BEL 20 SMI 20 Denmark MSCI Denmark UK MSCI UK OMXC 20 FTSE 100 Europe MSCI Europe NR Canada MSCI Canada Eurostoxx 50 S&P TSX 60 Finland MSCI Finland US MSCI USA OMXH 25 DJIA 30 France MSCI France NASDAQ 100 CAC 40 S&P 100 SBF 120 S&P 500 Germany MSCI Germany Russell 2000 DAX 30 Australia MSCI Australia MDAX ASX 100 TecDAX ASX 50 HDAX Hong Kong Hang Seng China Enterprise Index (HSCEI) Italy MSCI Italy HSI FTSE MIB 40 Japan MSCI Japan Netherlands MSCI Netherlands TOPIX 30 AEX 25 TOPIX 100 Norway MSCI Norway NIKKEI 225 OBX 25 New Zealand MSCI New Zealand Spain MSCI Spain NZX 50 IBEX 35 Singapore MSCI Singapore South Korea KOSPI 50 STI 30
APPENDIX 3 WITHHOLDING TAX RATES BY MARKET
Dividend Withholding tax Country requirement rate AUSTRIA 100% 0% AUSTRALIA 85% 15% BELGIUM 100% 0% DENMARK 85% 15% FINLAND 100% 0% FRANCE 85% 15% GERMANY 90% 10% HONG KONG 100% 0% IRELAND 100% 0% ITALY 89% 11% JAPAN 100% 0% LUXEMBOURG 100% 0% NORWAY 100% 0% SINGAPORE 100% 0% SPAIN 100% 0% SWEDEN 95% 5% SWITZERLAND 100% 0% THE NETHERLANDS 100% 0% U.K. 100% 0% U.S. 100% 0%