Leading Global Asset Managers on Custody, Securities Lending and Collateral Management: A Finadium Survey

Finadium Research Report

Leading Global Asset Managers on Custody, Securities Lending
and Collateral Management: A Finadium Survey

Finadium
May 2008

The growth of asset managers as both providers of securities and users of prime brokerage services promises to be the most important event of the next decade for custodians, prime brokers, securities lending agents, and of course the managers themselves.

Top global asset managers are going through a profound transition in their business models. Where once there was a clear distinction between traditional long-only managers and their hedge fund competitors, the typical large traditional asset manager can now offer its clients a menu of strategies including long-only, long/short, 130/30, portable alpha and structured products. Traditional managers now have an average 3% of their assets in hedge fund or similar long/short strategies; this figure is growing daily. This transition means that large asset managers are now prime brokerage clients and active users of securities finance products.

At the same time, global asset managers continue to be major consumers of custody and collateral management services, and are large providers of inventory to the securities lending market directly and through their custodians and third-party agents. From both sides of the market, asset managers are developing a more complete view of their custody, prime brokerage and lending activities. They come from a culture of regulation, oversight and detailed cost analysis, and this is playing out into how they select service providers and set up their long-term operations.

As beneficial asset holders in securities lending, asset managers have concerns in how they lend their portfolios. They are lending securities to their hedge fund competitors and want to capture the benefits of their own inventory. Highly increased collateral risk, the result of the credit crisis, has taken away the justification for asset managers to lend securities in quantity unless a high rebate rate will provide direct revenues. Corporate governance concerns continue to be prominent.

To better understand these issues, Vodia Group recently held a series of 32 detailed conversations with leading global asset managers in the US, Canada and Europe. Our discussions focused on custody, securities lending and collateral management, including the introduction of prime brokers as both custody providers and sources of securities finance products. What we found was the beginning of rapid and dynamic industry change.

This report should be read by asset managers, their service providers and their competitors. It is also of value to market strategists looking to understand how the securities lending market and alternative derivative products will evolve in the next several years. From the basic importance of the custodial relationship to asset manager views on supplying securities lending inventory, this report provides core data and analysis on major forces shaping the securities industry.

This report is 36 pages with 30 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
■ The Growing Importance of Asset Managers in Leveraged Investing
– Methodology
■ Custodians and Prime Brokers in Asset Servicing
– Traditional vs. Prime Brokerage Custody
■ Comparing Routes to Market in Securities Lending
– Custodians and Other Securities Lending Agents
– Auctions and Exclusives
– Direct Lending and the Importance of Intermediaries
■ Reducing Risk in Collateral Management
– Impact of the Credit Crisis
– The Special Case of Insurance Companies
■ The Age of Flat Supply
– Inventory Supply and Corporate Governance
■ The Value of Transparency for Managers with 130/30 and Long/Short Strategies
■ About the Author
■ About Finadium