Finadium Research Report

Buy-Side Technology for Margin and Securities Lending Management

October 2008

Managing margin and securities lending costs is the next great battleground for providing technology to the buy-side. The current crisis has emphasized the need for systems that help leveraged investors optimize their positions and portfolios across multiple prime brokers. Forward-looking hedge funds have already begun adopting these tools. While a few vendors have successfully recognized the need for more effective and efficient management of securities finance, we predict that the field will expand rapidly in the next three years as trade management systems, prime brokers and fund administrators enter the space.

The evolution of technology in securities finance is being driven by increased costs and volatility in securities lending and margin. Recent times mean that a successful fund using securities finance services needs to know the rules, metrics and decision making tools for all of their service providers. For prime brokers, smarter clients mean less drain on a balance sheet and lower overall risk exposure; this translates into a better use of capital for all parties.

Securities finance portfolio management is applicable to all firms trading leveraged portfolios. It may be even more critical for small firms than large ones as improved controls provide a strategic advantage. While larger funds have the resources to evaluate and buy technologies on their own, smaller funds will wind up receiving the technologies that prime brokers or fund administrators provide for them.

Technology for securities finance comes in two general categories, one for monitoring and trading securities lending rates and linked products, and another for managing the complexities of margin. The approaches vary widely and many offerings are at this point unique products with no direct competitors. One thing is for certain: the days of an Excel spreadsheet and a broker report for monitoring securities finance transactions are rapidly coming to a close. Similar to the adoption of execution management systems in equities, a new way of doing business is emerging in securities finance portfolio management.

This report is 29 pages with 8 exhibits.

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■ Executive Summary
– Key Point Summary

■ Securities Finance Portfolio Management for the Buy-Side

■ Volatility and Change in Market Structure
– Volatility in the Federal Funds Rate
– Volatility in Securities Lending Rates

■ How Banks Price Risk and the Impact on Borrowers

■ Technology Companies in Securities Finance Portfolio Management
– Leading Margin Management
– Securities Lending Optimization and Allocation
– Integrating Rate and Collateral Management Across Traded
– Comprehensive Derivatives Management
– Bringing Established Sell-Side Tools to the Buy-Side

■ Users, Distributors and Sticking Points
– Collecting Securities Lending Data

■ About the Author

■ About Finadium LLC


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