The views of institutional investors in securities lending are diverging, the result of long-held expectations about a market that values hard to borrow, intrinsic value loans over utilization of general collateral. At the same time, the broader securities lending market is slowly evolving into securities finance where lending can be one component of a firm’s financing and liquidity strategy. Larger pension plans and sovereign wealth funds recognize the shift for both themselves and their borrowing counterparties, and are following asset managers and insurance companies in taking advantage of structural change. Meanwhile, smaller institutional investors continue to see lending as strictly a return opportunity, albeit one that has shrunk considerably over the last three years.
While this divergence may result in some institutions leaving securities lending, the remaining institutional lenders will benefit from more concentrated borrower demand, an ability to use central counterparties (CCPs) as appropriate, and continued provisions for counterparty default indemnification. The new environment is not without its own challenges however, such as a need for internal coordination on the value, risk parameters, liquidity needs and ultimately revenue opportunities of securities finance going forward.
This Finadium research report is a deep dive into the thinking and practices of institutional investors in securities lending and related markets including repo and swaps for financing, together referred to here as securities finance. Part of the report serves as a historical compendium of collected data. Other parts, notably the sections on securities lending vs. swaps and on CCPs, look more towards the future. In sum, we aim to present a view of institutional behavior in the securities lending market and document how institutions are embracing, or not, the idea of securities finance as a broader category.
This report is 40 pages with 22 exhibits.
TABLE OF CONTENTS
■ Executive Summary
■ Why Securities Finance and Not Securities Lending?
■ Opinions on Securities Lending
– Program Participation
– A Commitment with Available Assets (with Indemnification)
– A Division in the Market (without Indemnification)
– Revenue and Fee Split Trends
■ Institutions and Collateral Guidelines
– Data on Securities Lending Collateral Holdings
■ The Reality of Securities Lending CCPs
– The Institutional Investor Response
■ The Role of Securities Lending in 2015
– Is It a Securities Loan or a Swap?
■ About the Author
■ About Finadium