The eighth annual Finadium survey of asset managers looks at the balance between risk and reward in a changing securities lending market. At long last, the market is evolving due to regulations and market behavior; this is no longer a projected impact but one that is evident in daily activity. The question is not whether securities lending will survive – it will – but how much do asset managers want to be a part of the market, how aggressively are they willing to meet borrower requests for collateral expansion, and how much revenue is acceptable or appropriate for asset managers to seek from their lending programs.
This question of risk and reward is critical to a range of policy decisions that asset managers are making about securities lending. The question is most acute for managers lending large amounts of general collateral; loans are still made actively but managers note reduced liquidity and more specific term requests from borrowers. Managers with large hard to borrow portfolios are less impacted and in some cases are having an excellent year with no changes to their loan or collateral policies. It is uncertain however how long even these managers will remain isolated due to borrower pressures from risk-based capital measures.
This survey should be read by asset managers, agent lenders, custodians and other service providers to assist with planning for the future. It is at heart a forward-looking document that seeks to offer insight into changing securities finance market conditions and provide a peer review. This survey asked 37 executives at asset managers with US$24.6 trillion in AUM about revenues vs. risk, their potential participation in central counterparties (CCPs) for securities lending, and how they will manage the impact of new regulations. In addition, we evaluate the published securities lending returns of 184 lending US mutual funds.
This report is 44 pages with 25 exhibits.
TABLE OF CONTENTS
■ Executive Summary
■ The Risk/Reward Decision in a Changing Market
■ Engagement in Securities Lending
– The Evolution of Custodians, Third Parties and Internal Desks
■ Securities Lending Revenue Generation
– Fee Splits
– Paying for Counterparty Default Indemnification
– The Future of General Collateral (GC)
– Revenue Growth or Shrinkage?
■ Gearing Up for CCPs
– CCPs, Indemnification and the Role of the Agent Lender
■ Cash, Non-cash and Collateral Transformations
– Collateral Management Policies
■ A Multitude of Regulatory Change
■ About the Author
■ About Finadium