Bloomberg: Fidelity brings securities lending in-house

Fidelity Investments is cutting out its middleman, Goldman Sachs, when dealing with Wall Street short sellers. The money manager is bringing its stock-lending business in-house, according to a March 29 regulatory filing, instead of paying Goldman Sachs to run it. According to filings, the bank received about 10% of the revenues generated by Fidelity’s lending, primarily to firms that borrow stocks to bet against them.

Fidelity, which managed $2.7 trillion of assets in March, plans to use some of the savings from the switch to boost returns in the funds that lend securities, particularly index trackers that hold thousands of different stocks. The move comes as Fidelity and its rivals compete to cut fees on index funds, luring assets that can be used for more profitable businesses like securities lending, industry analysts say.

Fidelity’s stock funds mostly invest the cash collateral in a dedicated money market fund, making it a rough yardstick for their total securities lending. At the end of February, the Fidelity Securities Lending Cash Central Fund had net assets of about $18.8 billion.

Boston-based Fidelity’s goal in taking over securities lending is to provide “an even greater benefit” to shareholders, according to a statement from spokeswoman Nicole Abbott. The funds will collect at least 90.1% of the revenue from their lending compared with the 90% they got when Goldman was the broker, according to Fidelity.

Fidelity’s brokerage will use automated third-party software to allocate loans to a pre-approved list of borrowers provided by the mutual fund giant, according to the March filing. It also purchased insurance to mitigate risks posed by borrower defaults.

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