July 2019

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Securities lending has seen a notable decline in volumes and revenues in 2019, the result of external regulations and technology advances, as well as individual actors making decisions that make sense in their own contexts. A continuation of this trend could result in longer-term damage and a move to other investment strategies that rely less on securities finance rates as a pricing input.

This report investigates the positions of each type of market participant, including beneficial owners, agent lenders, prime brokers and hedge funds, on current volume and pricing trends. While each type of participant has their own view of the problem, all agree that the market is not functioning optimally. The report evaluates market-driven solutions and what might happen if no actor elects to make change.

There are discrete winners in the current market, for example beneficial owners who own the highest priced specials, but even these firms may gain in the short term while losing longer-term revenues. For their part, hedge funds have the option to borrow at the right price but may face re-rating that ultimately damages their ability to earn revenues. As hedge funds pay the final bill, a reluctance to participate in the market damages activity for all parties.

This report should be read by all market participants in the securities lending industry including beneficial owners, agent lenders, prime brokers and hedge funds. Technology firms and regulators may benefit from a better understanding of what is driving each market segment in their decision making.

Table of Contents

  • Executive Summary
  • Why Have Volumes Declined?
  • The View from Market Participants
    • – Beneficial Owners
    • – Agent Lenders
    • – Prime Brokers
    • – Hedge Funds
  • Market-Driven Solutions
    • – What is Best Execution
    • – The Agent Lender Business Model
    • – A New Kind of Pricing Methodology
  • Charting Possible Outcomes
  • About the Author
  • About Finadium LLC

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