Transforming the Agency Lending Business Model

November 2014

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Securities lending agents for beneficial owners, including pension plans and fund complexes, have built robust businesses based on their deep experience in the financing markets and relationships with counterparties. A regulatory, technological and operational infrastructure now exists around agency lending that was hard to image twenty years ago. Even so, securities lending is in the middle of substantial change. In order to remain successful franchises, agent lenders must evolve to meet market demands. Financial markets are built on innovation and agency securities lending is no exception.

This report is a fresh look at the agency lending business model and an examination of three scenarios for its evolution. The scenarios are based on several market assumptions: a decreased demand for general collateral; the emergence but not market takeover of central clearing in securities lending; and continued regulation that brings increasing transparency to securities lending and related transactions. There is no scenario in which the need for securities finance transactions disappears; the vital questions are what shape does this need take and how is the need met.

This report has been written for agent lenders, their beneficial owner clients and regulators looking at the evolution of the important market function of securities lending. For agent lenders, the report offers ideas for how internal organizations may adapt their business units to suit emerging market needs and regulatory requirements.

Beneficial owners may better understand the current dynamics of their agent lender partners and how they may expect their own business arrangements to change. The report may also encourage beneficial owners to consider proactive updates to their own lending programs in expectation of future market changes.

Regulators looking at securities lending will gain insights to how lending may evolve over the next two years, with implications for how regulations are considered going forward.

This report is 35 pages with 12 exhibits.

TABLE OF CONTENTS

■ Executive Summary

■ The Successful Agency Lending Business Model of Tomorrow
– Data on the Agency Lending Market
– How Much Money Does Agency Lending Earn?

■ Market Trends and Major Assumptions (After Regulation)
– A Four-Tiered Pricing Market
– The Client Need for Liquidity
– The Growth of Delta One and Synthetic Financing
– Consolidation of Bank Business Lines

■ Three Scenarios for Agency Lending
– Scenario One
– Scenario Two
– Scenario Three

■ Overcoming the Basic Problem of Agency Securities Lending

■ About the Author

■ About Finadium