Finadium: Agent Lender Survey shows outlook for 2021, product development and data trends

Finadium has released a survey of securities lending agents conducted in February and March 2021. The report covers how the agency lending business has changed during COVID-19, technology objectives, newer routes to market, implications of GameStop-style trading and market perspectives for the next two years.

The report shows how agent lenders are delivering value to clients through communications and data access. A key finding is that agents themselves have a generally positive outlook on their business opportunities going forward, and that hiring has remained largely consistent through the last year. While securities lending has faced headwinds in 2020 and challenges remain, agent lenders themselves see dynamic growth opportunities going forward.

While all agents continue to support borrower needs for securities loans to ensure settlement and meet regulatory obligations, a portion of the market is offering a broader range of outsourcing services for Treasury and Peer to Peer operations. This may wind up changing the definition of what it means to be an agent lender.

This report should be read by any market participant looking to understanding the current outlook of agent lenders. Regulators and asset managers may benefit from the agent lender perspective on how lending fits into the broader investment landscape. Technology firms may see opportunities for product development, and any beneficial owner with a vested interest in the securities lending market will find insights into how to maintain competitive positioning and work with their agent lenders. Finally, agent lenders may benefit from a peer level review of their businesses, especially as a section of the market expands to offer more diverse services.

Outlook for 2021

A combination of market realism and client engagement has left agent lenders either positive or neutral about the rest of 2021 for their businesses (see Exhibit). No agent had an entirely negative outlook, a fact that we consider important as a signal of the industry’s perspective on client interest and continued investment in the business. The trend towards positivity could be explained as a case of a business that attracts and retains people who are optimists by nature, but may also be the result of new opportunities for agent lenders, including the removal of obstacles thrown up by events throughout 2020. On the neutral side, concerns about some aspects of the business like oversupply are ongoing. A few agents also commented about some of their peers focused on lending in international markets: the disappearance of European activity in particular has left those businesses exposed to possible closure.

A challenge that agents recognize and believe they can surmount is inconsistent thinking about the ability of ESG-oriented funds to successfully participate in securities lending. Finadium finds no incompatibility between ESG and securities lending, and even opportunities for outperformance, a fact generally agreed upon across the industry and emphasized in industry association reports. But as ISLA’s chief executive, Andy Dyson, noted in early March, popular opinions about the operations of securities lending may suggest otherwise, and agents need to work with clients to help them understand what happens to their investments in the process.

One sure cause for confidence is that 2020 and 2021 look nothing like 2009 and 2010 from a financial services perspective. Agents say that 2020 is a blip, and that reforms put in place across Basel III, Dodd-Frank and a raft of European regulations have strengthened bank balance sheets to the point where they are a non-issue in client conversations. Where clients pulled back from lending after 2008, this time clients are far better educated and have asked calm questions while largely staying in their programs. A number of agent lenders reported growth in 2020 and early 2021, with new clients signing on in the midst of the pandemic.

A direct link for Finadium subscribers to the 2021 agent lender survey is https://finadium.com/finadium-report-desc/agent-lenders-in-securities-lending-2021-a-finadium-survey/

For non-subscribers, more information is available here.

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