Our kudos to Gene Alvarez, global head of operational risk for securities lending at JPMorgan Chase. In a recent Risk.net interview, Alvarez pointed out opportunities for securities lending agents in a time of lowered volumes and regulatory change. We think that Alvarez is onto something. Below are some of his and our ideas for agent lenders to take advantage of the times.
The best idea (we thought) of Alvarez’s cited by Risk.net is product suitability disclosure that leads into reporting services. We have been seeing this need for reporting at several levels in the securities lending value chain lately, ranging from Alvarez’s point that brokers need to prove product suitability to the broader issue of mutual and other commingled funds reporting securities lending activity to retail and institutional investors.
As an example, an institutional investor knows that its commingled fund is lending securities but has no visibility into what is on loan or the collateral held. The mutual fund knows it is lending securities and probably can tell you what is on loan, but communicating that regularly to clients can be problematic. In the meanwhile, clients start to worry that their S&P 500 fund is secretly holding subprime mortgages in its collateral pool. Securities lending agents can generate trust, goodwill and probably fees by providing reporting to the mutual funds’ clients in a seamless manner.
Securities lending agents are ideally suited to provide reporting information if they choose to get into the game but need to act before the data vendors get there first. Smart securities lending data vendors could also offer this service but it would take more work for them – they don’t hold the collateral information that the agents have as a matter of course. The Bloombergs and Thomson Reuters are better suited but have to make deals with one of the securities lending data providers. As we’ve noted before, regulations make new winners and losers; securities lending agents have been hit with lower volumes but have the opportunity to make up new revenues elsewhere.
Alvarez also cites the opportunity to look at cleaning up old ways of doing business and revising legal agreements to fit the times. Nice thinking.
The interview with Alvarez in Risk.net is here.
Our shameless self-promotion of a recent Finadium survey of US plan sponsors that discusses the mutual fund reporting idea is here.