SunGard has published a white paper looking at the possible elimination of GC lending. From the Introduction:
In the post crisis world of securities lending, there has been a well-documented trend towards the lending of securities with high borrowing costs based on an intrinsic value, so called specials, compared to the low cost, highly liquid general collateral (GC) securities. Indeed in a related insight piece, we discover this trend has established itself clearly in the all-important measure of revenue – that is, high end specials account for the largest portion of lending revenue across the industry and for most individual lending programs as well. that being said, the volume of GC lending has remained persistently high even as it yields to specials as
the driving force behind income growth.
so in the securities lending industry, where returns are increasingly being pressured by regulations and market forces, why do beneficial owners continue to make available large numbers of the low margin GC rather than focus their lending programs predominantly on high-cost securities that generate the highest returns? It would seemingly make sense to optimize one’s assets where the highest returns can be made. Indeed there has been speculation by many over the past six years that GC lending may be a dying activity.
It may not be quite as simple as this however. although GC revenues are comparatively low, this may not be the deciding factor why beneficial owners do, or will continue to, lend these low risk, low return securities. likewise while borrowers continue to demand GC, surely there will always remain a reason to lend them? what’s more, and perhaps one of the overriding factors in the securities lending industry more broadly, is the impact of upcoming legislation; the future balance between GC and specials lending may in the end not be determined by an underlying trend within the industry, but rather legislative changes from outside.
In addition, these changes may by necessity, bring about a different way of considering one’s lending portfolio. For beneficial owners to know where revenue is coming from and where they need to cut their losses, perhaps the traditional lines of asset class and regions are no longer adequate on their own.
The full report is available at http://image.exct.net/lib/fef21c737d6002/d/1/130916%20WEB%20CM9093%20Astec%20Analytics%20WP%20A4%20V3.pdf.