Following news reports of a securities lending lawsuit over fees, we thought it a good idea to put down on paper our own thoughts about fee splits between beneficial owners and securities lending agents. This is of course a very touchy topic and one that as consultants we have bumped up against repeatedly over the years. While we have made every effort in our reports to spell out both our data findings and our own thinking, we have also seen articles in the press that have shown excerpts from our work that seem to skew our words in different directions. We’d like to set the record straight.
We are often asked what is the right fee split in securities lending for a beneficial owner. Our response consistently has been “It depends.” Since 2007 we have collected data from interviews and public filings from pension plans, sovereign wealth funds, mutual funds and insurance firms on their fee splits with agent lenders. We have consistently found that while there are groupings of splits, for example the largest firms and funds tend these days to have a 90/10 or similar arrangement, there is substantial variation in the market. In our latest survey of institutional investors, we found that “while securities lending fees are now almost universally spelled out for institutions by custodians and third party lending agents, there is still a fair amount of bundling in the pricing of services that prevents an “apples to apples” comparison between securities lending fee splits.” A fee split of 75/25 or 65/35 may turn out to be a very good deal for a beneficial owner of a given size and portfolio mix when other costs and services provided by the same or different providers are taken into account. Cash collateral management fees, service levels and performance should also be considered. Securities lending remains very much a one-size-does-not-fit-all-market, and Josh Galper said as much at IMN’s Beneficial Owner Conference last week in New Orleans.
The apples to apples view can be achieved when looking at the suite of services and range of costs paid by a beneficial owner, but this is often work that beneficial owners do not want to do. And let’s not fool ourselves – it is work to figure this all out and present a final conclusion, and it does cost time and money. Beneficial owners need to want to know what the right fees are for their plans and funds.
The methodologies that we use to collect securities lending fee split data are the following:
1) We ask beneficial owners in our targeted surveys that capture the thinking of 25-40 market participants. We have found over the years that 30 is about the right number for a survey to capture the major trends.
2) We collect publicly available data on securities lending and custody fees wherever available. In our latest institutional investors survey that meant data from 91 US public pension plans in their annual reports and other filings; other data gathering efforts have come from different sources.
3) We conduct RFPs, which is the truest finding of what the market would charge a particular beneficial owner at any given time for securities lending services.
For beneficial owners looking to find their right securities lending fee splits, Finadium surveys might be a good guide, but really there is no shortcut for an analysis of each individual portfolio and servicing needs. A small plan paying little for custody will pay more for securities lending, and a plan with an agent lender that now needs to take an explicit charge for indemnification may pay more still. Each analysis and subsequent RFP process will determine the right pricing for each beneficial owner.
In the current case, is BlackRock right or do the pension plans suing have the best argument? We haven’t done their analysis and can only say, “It depends.”