Securities Lending in Canada

A Q&A with Don D'Eramo

April 30, 2014

SLT’s Canadian experts agree that that lending in the country is strong, with increased interest in the mining sector and typical keenness for government debt helping to keep the country ticking along.

Q. How would you describe the current state of the Canadian sec lending sector?

A. The securities lending market in Canada is strong. We have new clients entering our program for the first time. And there is definitely an increased level of confidence as the market gains stability, particularly on the reinvestment of cash collateral. Clients are more willing to broaden their collateral parameters and are more willing to look at opportunities. We’re also seeing more variety in the types of clients we are working with.

Q. What are proving to be the most popular trades at the moment and why?

A. Regulatory changes are creating great demand for non-cash collateral right now. In particular, clients are looking for high-quality collateral due to central clearing of over-the counter derivatives. In addition, borrowers are increasingly looking to fund high-quality collateral with other asset classes, particularly equities.

Q. What will be the effects of Canada’s regulatory change in October that expanded the definition of a “qualified security”?

A. The proposed amendment to section 260 of the Income Tax Act remains a positive development to the securities lending industry in Canada. Expanding the borrowable universe of securities to include non-Canadian exchange traded funds (ETFs) and real estate investment trusts (REITs) will generally create opportunities for beneficial owners and borrowers that previously were inaccessible. While the immediate effects haven’t been pronounced yet, this removes obstacles that had previously restricted lending of these securities.

Q. How will the regulatory change make Canada more attractive to lending businesses?

A. In two ways. For Canadian lenders, loans of non-Canadian ETFs and REITs would qualify as “securities lending arrangements” under Section 260. Prior to the change in definition, these loans did not qualify because foreign ETFs and REITs were not “qualified securities.” Second, prior to this change, foreign ETF compensation payments paid cross border were subject to Canadian withholding tax, as these payments were Canadian-source income. Changing the source of these ETF compensation payments from Canadian to foreign will allow Canadian borrowers to make these payments without an obligation to withhold Canadian tax.

Q. How are businesses looking to expand their collateral lists?

A. Regulatory changes are driving borrowers to increasingly look for ways to transform or fund other and alternative assets. Clients are re-examining their risk appetites. As an agent lender, we work closely with our clients to illustrate and help them weigh the risks and returns on these market developments. We offer clients our view on the kinds of trades and collateral and talk to them about whether the approach aligns with their risk appetite.

Q. Has the trend of collateral transformation been adopted in Canada?

A. Collateral transformation has always been a component of our securities lending program in Canada. Our rigorous risk management approach has allowed us to take advantage of these opportunities when it aligns with our clients’ risk parameters. It’s all about the communication and knowing the client well. With a good analysis of the opportunities — including an understanding of liquidity, risks and transparency — and a good understanding of the clients’ risk parameters, we can quickly and efficiently engage in discussions with clients about opportunities that are likely to be relevant to them.