COVID-19: The Impact on the Securities Industry
The world has been dealt quite a blow as Novel Coronavirus fuels massive fear and anxiety among financial experts in the securities lending field. As soon as the Coronavirus outbreak hit the U.S. Stock Market, fears skyrocketed amid lenders. At first, it seemed as President Trump, abated fear with his attack on the pandemic. As the world watched, and the domestic market steadied, Asia and the other international markets followed. But as of March 16, 2020, with the global pandemic showing no signs of flattening, the world held its breath collectively. It wasn’t enough that on Sunday March 15th, New York, a financial hub for the entire world, shut down essentially everything except the stock market. But then, as global citizens watched with bated breath, on Monday, the Dow dropped and unprecedented 3000 points, President Trump said, “it is not under control,”, China saw new cases, and Italy saw it’s biggest one day jump (over 3500 new cases) since the outbreak.
Now it seems as if reality has excluded no one and nothing in its path, and that includes the securities industry. The effects on the global economies have spread to the securities sectors almost as fast as the surly pandemic.
In an irony that has spared no one, 2020 rolled in like a lamb, appearing rather tame for securities lending markets who started the year well-positioned for revenues in 2020. Then, something called Coronavirus broke out in China, originating in Wuhan. A highly contagious virus, the world watched as China moved swiftly and some say punishingly, to contain the virus, and they did… or so it seemed. But like a slow dominoes fall, the virus befell the world slowly and then picking up speed until it crippled Italy, Iran, Spain and France in its wake. Then, there was the United States. As China hit a plateau, the world again watched as it looked like it wouldn’t be as bad. But at the close of the second week of March, cities were imposing curfews, schools were shut down, and the outbreak numbers were only two weeks behind Italy’s which is now losing people at astronomical rates. San Francisco has ordered people to shelter in place.
Financial market participants are floundering to adjust their shorts to hedge against inevitable loss and nearly every institution has implemented an emergency contingency plan. But as no one knows where this will end, even a long-term contingency strategy may not be enough. When the biggest financial centers in the world, fight attain radical containment, the markets will be spooked, no matter what the Fed does to quell recession or even depression like stock market lows.
How is this affecting securities lending?
International observers, but especially in the U.S. and Asian markets, have warned that emergencies of this kind, can and will affect the markets, and now is the time to test that business continuity contingency plans to ensure investors don’t suffer of the long term. But since the events are unprecedented and shifting by the hour, contingency and continuity plans may not be enough. After all, the United States Supreme Court cancelled hearings which hasn’t happened since the 19th century. That should rise to the level of at least, more than worrisome even with the best continuity plans in place.
For securities lending participants specifically, all or any of this early volatility, might not be a “real” indicator of the macro picture over the long term. We have never been here before. But if it is, then the early signals, have the world in a collective free fall, with of course, the most vulnerable of those sectors, being tourism and securities lending. According to an article in Time, titled, Federal Reserve Cuts Interest Rate to Near Zero in Response to COVID-19 Outbreak, on March 15th 2020:
A short-term lending market that many large companies use to access cash, known as the “commercial paper” market, has been hit with far more sellers of debt than buyers. That has caused interest rates for those loans to spike, threatening the ability of larger businesses to borrow. Mark Cabana, a rates strategist with Bank of America Securities, said that revenues are plummeting for many corporations and they are seeking to sell commercial paper to raise cash. If they are unable to, they could be forced to lay off workers or even go bankrupt.
According to another article in, Pensions & Investments
Some money managers are picking over stock markets, searching for value amid the panic caused by the spread of the coronavirus. Opportunities are being found in India and in currency pairings, executives said. “We have added to our exposures in Indian stocks within our China India fund,” said Ken Wong, Asian equity portfolio specialist at Eastspring Investments based in Hong Kong. “As bottom-up stock pickers we are seeing a lot of stocks that are now trading well below their intrinsic values, which is providing a lot of value now.”
And, said Georgina Taylor, multi-asset income fund manager at Invesco, Oxford, England, when quoted in the same piece,
…currencies are also impacted by the flow of money around the world. When investors get nervous, they often take their money back home and this in turn pushes up the price of the currency.
Regardless of speculation, the Dow was down 2997 points at the close of trading on Monday March 15th, after President Trump said at a press conference when referring to a conversation he had with his young son, Barron, that it was, “bad, very bad.”
Most notably, an article in Security Lending Times, published a quote and a bleak awakening for some, to heed his warning. Said Nigel Green, founder and CEO of deVere Group:
It seems that this week the world is waking up to the reality of the situation as the containment of coronavirus hasn’t yet materialised and confirmed cases soar in different countries. Until such time as governments pump liquidity into the markets and coronavirus cases peak, markets will be jittery triggering sell-offs. Whilst I am confident that we’ll narrowly avoid a global recession in 2020, no-one can accurately predict the future.
As if on cue, the New York Fed then announced today, that they will conduct a $500 billion repo operation this afternoon, to pump money into the system. This type of strategy (Repo) means banks will put up high collateral like treasuries, in exchange for the liquidity they need to function without going under.
And, finally people around the world breathed a collective heavy sigh, particularly, the financial and tourism sectors, as we wait for this brutal Coronavirus to abate. Nevertheless, we are nowhere out of the danger realm and unlike China, the U.S. is not an authoritarian state. So, for now, all those with any interest at all in the financial markets, will remain jittery – that means all of us.