This survey of agent lenders conducted in Q1 2024 shows the thinking of business leaders across technology, client segments, borrower balance sheet constraints and the outlook through 2025. While regulatory and technology trends are moving fast, securities lending agents report that they are optimistic about the future of their global franchises.
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Although demand has been muted for deep special US equities, other pockets of activity have remained robust. Agent lenders say that 10 names are producing 30%-40% of revenues in 2024 instead of one name driving 90% of revenues. As a speaker at the Finadium Investors in Securities Lending (FISL) 2024 conference noted, if a program is holding one of these 10 names then they are doing well, as are ETFs when hedge funds are shorting for macro protection, otherwise earnings may be mixed.
Financing, corporate bond and Asian/Middle East securities lending trades remain generally strong, and while the associated revenues are not as large or pronounced enough to offset weakness in US equities, they still earn a premium to General Collateral and keep agents and their clients engaged. For agents without a strong US equities presence to begin with, there has been no meaningful change to 2023 revenues at all and even some improvement.
Horizontal, not vertical, is a motto of agency lending today including for business users and client services. This applies to both custodian and third-party agent lending programs, where investments in data, pre-trade analytics and straight-through processing in post-trade are seen as competitive differentiators.
The business of lending securities to facilitate short sale and operational fail coverage remains steady, while agents with a diverse client base report that their newer development efforts are focused on cross-collateral product optimization. This can present opportunities for agent lenders in broadening out their business lines.
There are fewer differences now than in 2022 between bank and non-bank agent lenders, and between custodian and third-party programs. Necessity mandates invention and the industry is primed for innovation, even if that means moving past decades-old business practices to evolve.
Participating in securities lending remains attractive to asset managers and owners. Data from the International Securities Lending Association (ISLA) show total available inventory at US$29 trillion and assets on loan at US$2.6 trillion at the end of 2023, both at or near record levels. Even though revenues may fluctuate and are reportedly drifting lower for clients with high Risk-Weighted Assets (RWA) compared to more attractive types, clients are not choosing to leave the market. Rather, a large pool of available assets, especially for GC, is the expected norm going forward.
This report has been written for the broad securities lending community. Agent lenders may benefit from a peer review. Clients, counterparties, service providers and regulators may find insights to assist their own planning and oversight roles.
A direct link to the report for Finadium research clients is https://finadium.com/finadium-report-desc/agent-lender-survey-2024/
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