A follow up on cooperation between agent lenders and prime brokers

In a recent article on intraday securities lending data, we said that “the securities lending agent and prime broker relationship has been evolving in recent years towards greater cooperation.” We received feedback that some people disagreed with this statement or that there was confusion about what “greater cooperation” actually meant. To that end, we’d like to clarify what we meant and how we got there.

In December 2011 we released a report called “Borrowing Stock in 2011: Agent Lenders on Prime Brokers in Equity Securities Lending.” For this report we interviewed a good number of custodial and third party agent lenders representing a majority of the market by available assets. One of the things we wanted to know in particular is whether they viewed their prime broker counterparts as competitors, colleagues or a mix of both. Here are some of our conclusions:

The number of arguments over re-rating has declined substantially over the last few years.

Information flow is one of the central themes of the agent lender/prime broker relationship, and this flow is expressed on a daily basis through negotiations on rates, terms and types of transactions. There is one pie of revenue for each securities loan; finding a fair middle ground for the majority of transactions ensures a productive long-term relationship.

In the end, both agents and primes are client driven and these clients must be answered to. If one side feels overly disadvantaged, that could have the result of damaging the overall relationship, and neither party would see long term benefits from reducing business with a counterparty that can offer meaningful flow. As one agent noted, while information remains an advantage to the party that has it, both sides are willing to discuss fair pricing for mutual advantage.

Not all is perfect of course, and agent lenders and prime brokers can still find plenty to argue about. Agents note that 20% of their counterparties continue to be very contentious about pricing securities. Agents also want to support their clients interests which may mean being more forceful about their own pricing desires.

Our findings were supported by a March 20 2012 article in Securities Lending Times (“Prime Time” by Anna Reitman). According to a executives at a well-known US prime broker, while transparency has increased pricing competition between agents and primes, it has also “increased partnerships as well, which themselves have gotten more strategic.” Further, “sharing information is becoming more important every day.” Other examples of greater cooperation and changing dynamics relative to three to five years ago are found throughout the article.

Our comments are specific to agent lenders and prime brokers, not the relationship between custodians and prime brokers. The two are substantially different. While there may be some day to day turbulence over short-term issues, overall, compared to three or five years ago, agent lenders report greater cooperation with prime brokers today. We have comments about the prime broker/custodian relationship as a separate matter and will release an update to our 2010 briefing on Prime Custody shortly. We hope readers will stay tuned and please let us know if further questions arise.

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