The securities lending agent and prime broker relationship has been evolving in recent years towards greater cooperation. Both sides recognize that there is one revenue pie, and maximizing the size of the pie may require working together so that everyone’s interests are served. This is a significant change than five years ago, when a “me first” attitude prevailed, particularly at prime brokers. Today, only 10%-20% of prime brokers maintain this mentality, according to agent lenders. Now securities lending data has stepped into this relationship.
Securities lending data used to be released only once per day, and while agents and prime brokers might have discussed rerates, it was always with the awareness that the data were somewhat stale. The emphasis then was on the savviness of each firm’s traders and how closely in tune they were with market activity. This was the power of the relationship market; the more that traders knew the actions of other firms, the better they were able to price their loans with counterparties.
Intraday securities lending data speeds up the rerating conversation by a substantial factor, forcing both agent lenders to recognize when the market is perceived to move for or against themselves and their clients. In a way, intraday securities lending data is like a fax machine: the more people that have them, the more useful they are. But unlike fax machines, even if only most people have the data, the data still has critical mass.
In addition, while there is no agreement that intraday lending data always has the right price, at least there are benchmark references for the market. The introduction of more securities lending data also breaks down the historical strength of the securities lending traders; relationship still matter, but having access to the most current data matters more.
Intraday securities lending data also affects important metrics that agent lenders use to evaluate prime brokers and vice versa. Agents are now equally concerned about the quality of borrowers and the quantity of securities that a borrower may request. For example, if a borrower is utilizing large quantities of securities that otherwise may not be lent, this adds value to the agent’s program. If these metrics are measured using intraday data as opposed to data that’s updated only once a day, the agent lender/prime broker relationship becomes much more sensitive to intraday rate movements.
As agent letters and prime brokers engage more with intraday securities lending data, they are also inadvertently speeding up the pace of transparency. The more that transactions pump into securities lending data vendors, the more that all participants in the market can be aware of rate and volume changes. Regulators also benefit from this increased transparency, and we suspect they will mandate that all participants subscribe to intraday securities lending data feeds as a way of tracking the market.
For more on the agent lender/prime broker relationship, see Finadium’s December 2011 report, “Borrowing Stock in 2011: Agent Lenders on Prime Brokers in Equity Securities Lending.”
1 Comment. Leave new
A reader emails:
“I really liked this article. I would argue that relationship should not matter at all though most in this business would not agree with that statement. In my opinion when someone asks for a “favor” that would be “good for the relationship”, they’re asking you to do something that is not in your best interest and that’s the conflict of interest that the Agent/PB relationship has always had. As you noted correctly, the availability of data is dramatically changing this dynamic as one can’t simply explain away variances like they could when the data was not as readily available.”