Fintech Focus: Private Indemnification Markets in Securities Lending

Finadium
April 2017

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The provision of counterparty default indemnification in securities lending remains one of the limiting factors to market expansion, impacting both agent lender capacity and investor participation. Indemnification costs are now expensive liabilities on bank balance sheets. Meanwhile, indemnification remains crucial for investors to comfortably engage in the market. It becomes only more important when investors contemplate doing business not just with the largest borrowing banks and brokers, but directly with hedge funds and other buy-side firms.

For the securities lending market to grow and diversify, a new form of indemnification would be a helpful addition. We propose a private indemnification market or indemnification facility, where cash investors have the opportunity to provide insurance to investors in securities lending programs against the possibility of counterparty default. We offer an example process model that details the operational flow as well as business and technical considerations.

This report is part of Finadium’s Fintech Focus series, offering product and technology specialists a dedicated window into capital markets.

This report is 14 pages with three exhibits.

TABLE OF CONTENTS
■ Executive Summary

■ Challenges to the Incumbent Indemnification Model

■ The Argument for an Indemnification Facility

■ Business and Technical Considerations
– Process Flow

■ Commercial Opportunities

■ About the Author

■ About Fintech Focus

■ About Finadium LLC

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