This report is the result of Finadium’s monitoring and evaluation work in securities lending. We have boiled down the key elements of our methodology for securities lending analytics in a readable package. The execution of our methodology still takes time and requires comparative data, but this report lays out a concise platform to define and measure desirable performance.
The determination of success in securities lending is by definition subjective: most firms have their own views of what success means and how to achieve it. Profitability is typically core to measuring performance, but it can also be a function of getting the best rate, optimizing collateral usage or generating liquidity. These options generate profitability in various ways but require different factors for analysis to understand whether the strategy was successful or not.
This report provides quantitative and qualitative metrics that Finadium looks at to determine a successful securities lending program. The question always starts at the same place: what is the program meant to achieve and how is it structured to deliver on these goals? Few investment firms look for unfettered income; rather, most firms have limits on the percentage of their securities they will lend, restrictions on lending during a corporate action, or other gates that prevent the loan of every possible security that is in demand. There are also often collateral restrictions that make some loans unprofitable. These guidelines create a balance between what an investor sees as reasonable and prudent compared to what revenues can potentially be earned.
This report has been written for investors in agency and principal securities lending programs to frame what success means in securities lending, whether that is profitability, risk-adjusted returns, safe collateral or something else. These ideas can then be translated into a policy statement that can be communicated to clients, regulators and service providers, and tested for effective execution. The greater the clarity in communication, the more likely that investors and their clients will experience a positive outcome.