Putting assets to work
collateral management
The Rabobank Group holds a huge number of assets. Robeco, for example,
invests in stocks and other securities through their funds. But what do we do
with those assets once they have been purchased? And how can we make them
work for the Group even more efficiently? Recently recruited collateral manager
Roy Zimmerhansl has the answer to these and other related issues.
14 What'sNewS Issue 11 November 1998
How do borrowed securities fit into a trading
strategy?
What is collateral management in the
context of Rabobank?
Basically, what we do is try
to get extra value out of
assets. You do that by
putting them to work. We
act as facilitators in that
'work'. We are intermediaries
between suppliers of assets
and people who want them.
On the supply side, we work
with investment managers
and institutional investors.
Robeco is a good example
within the bank, but also any
investment manager, any
pension fund, retail or unit
trust mutual fund could be a
potential relationship for us.
What about the demand side?
That could be Rabobank
itself or basically anyone who
wants to borrow securities to
support their trading strategy.
Borrow securities?
Absolutely. People borrow
cash all the time. Why not
securities, it is the same thing. If you
look at, say, a pension fund, then you
see that cash flows into that fund.
The fund managers then invest that
cash - in stocks, in bonds. When you
buy something, you're actually just
changing cash into something else. So
if you look at it from the perspective
of the investor, once they have made
their buy decision, they only have
one decision to take: when to sell. So
you have institutional investors
sitting on assets which obviously earn
New recruit, collateral manager Roy Zimmerhansl, involved in making
assets go that extra mile
dividends or interest payments, but
that is all. What they could do is try
to make more money out of those
assets. Just as a bank lends money,
they can also lend out securities to
someone who needs them. And just
as a bank receives interest payments
for cash lending, the tender in this
case receives a fee payment from the
borrower in addition to collateral.
What we do is try to facilitate that
process, which is why we're often
called collateral managers.
Companies raise cash in
the normal course of their
business through bond
issues. There are different
kinds of bond issue more
shares, commercial paper,
etc. Another alternative is
the convertible bond. Now
let's say our trader thinks
'X Pill Corporation' thinks
the way things are going in the world
economy will mean this
internationally operating Japanese
company's yen earnings will go up,
but world-wide sales will be down. lil
other words, the view on 'X Pill' is
mixed. Our trader may think: I like
the idea of having an 'X Pill'
convertible bond because I think
stocks will eventually come back.
Rather than buying the stock and
hop-ing it will go up, you buy the
con-vertible bond. It acts like a bond
There are a number of strategies. Let
me give you a couple of examples. As
I said, this is very much a supply and
demand business. The supply comes
from instutional investors and demand
from traders. Traders may want to
borrow stocks rather than buy them,
depending on trading strategy. It is not
that strange - after all, you borrow
cash temporarily, so why not stocks if
that meets your strategy at
that time.
A trader may look at a
particular company and,
based on analysis, may
believe the stock is
overvalued. If he or she
doesn't own that stock,
then there is nothing he can
do with that knowledge, he
can't make any money with
it. Alternatively, he can
then borrow the stock and
sell it on. If he was right,
and the stock was
overvalued and has
subsequently fa Men in price,
then our trader buys it for
less than his own selling
price when the lender
wants the stock back.
And bonds?
