Institutional Investors on Securities Lending, Collateral Management and Leveraged Investing: A Finadium Survey

Finadium Research Report

Institutional Investors on Securities Lending,
Collateral Management and Leveraged Investing:
A Finadium Survey

Finadium
January 2009

The next wave of institutional thinking in securities lending, collateral management and leveraged investing is focused on risk reduction. From lending securities for the rebate rate instead of the collateral reinvestment opportunity, to looking at central credit counterparties as a potentially realistic option for risk management, institutions are open to new ways of doing business that protect and enhance revenue streams. Stakeholders in these markets have already enrolled in a crash course in market savvy, paid for in advance with deteriorated wealth and a lost sense of security. Service providers able to engage in rigorous risk management and foster more thoughtful communication are those most likely to help their clients going forward.

In this report, Finadium releases key findings from its annual survey of institutional investors. Our interviews covered 34 leading public, private and nonprofit funds managing nearly $747 billion in assets. Our open-ended interview format allowed institutional managers to provide their own feedback on the markets in 2009 and beyond. We supplemented our conversations with data from the annual reports and updated filings of 85 US public retirement plans; these plans managed $1.9 trillion, or nearly 60% of all US public plan assets.

Our interviews focused on three core subject areas: involvement in securities lending programs, risk in collateral management and attitudes towards leveraged investing including hedge funds, 130/30 and exchange-traded products. The output of these interviews provided fresh material for analysis and a valuable comparison with findings from our 2008 institutional survey.

2008 was a record-setting year on many levels, even in the traditionally staid confines of custody, securities lending and collateral management. Between massive losses in collateral management pools, short sale bans and funds ending their lending programs, this is a year that most people involved in securities finance would prefer to forget. Going forward, the events of 2008 have set the stage for a new conservatism that will impact market activity for years to come.

This report is 34 pages with 29 exhibits.

If you are a research subscriber, please use the Client Login above for a copy of this report. For all others, please contact us at info@finadium.com.

TABLE OF CONTENTS
■ Executive Summary
■ Finding a New Market Equilibrium
– Methodology
■ Securities Lending Supply
– Changes to Inventory Supply
– Revenues, Utilization and Spreads
– Agents, Auctions and Exclusives
■ The Extent of Conservatism in Collateral Management
– Unbundling Securities Lending and Collateral Management
■ Institutional Attitudes towards Leverage
– Futures, Swaps and Hedge Fund Regulation
– The Future for 130/30 Strategies
■ The Shifting Sands of Risk Management
– Counterparty Risk and Central Credit Counterparties
– Evaluating Custodial Relationships
– Securities Loans and Market Quality
■ About the Author
■ About Finadium