Finadium Research Report
Securities Lending Exchanges in 2009
Like any disruptive business model, electronic securities lending marketplaces (“exchanges”) seek to alter the landscape of their industry. From moving traders towards an electronic screen to linking loan activity with automated post-trades processing, exchanges are quietly looking to capture a small amount of market share while winning over major lenders, borrowers and intermediaries. 2009 will be a testing year, with exchange operators launching and revising their business models and marketing strategies.
While the current crisis did not spur their creation, securities lending exchanges have benefitted from a raised awareness of risk in the lending process. To some, exchanges are a means for finding liquidity while lowering operational and counterparty risk in the process. To others, exchanges upset healthy risk management practices by exposing participants to a more diverse group of borrowers and lenders.
As they evolve, securities lending exchanges will affect the lending market across asset holders, custodians, brokers and hedge funds. From helping to create a two-tiered prime brokerage system for stock borrowers, to changing the flow of data that provides securities lending transparency, the role of these marketplaces will be felt in most areas of securities finance. Perhaps most importantly, exchanges have the potential to turn the utility function of securities lending, where loans are made to fulfill the needs of other trades, into a model where the loans themselves are a traded product.
This report is 41 pages with 14 Exhibits.
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TABLE OF CONTENTS
■ Executive Summary
■ A New Model for Securities Lending
■ The Profit Motive: How Much Is At Stake?
– Two Scenarios for Securities Lending Exchange Fees
■ Participants and Market Access
– Retail and Institutional Lenders
– Custodians and Institutional Lending Agents
– Prime Brokers and Hedge Fund Borrowers
■ Market Mechanics
– Central Credit Counterparties
■ Contenders and Dark Horses
– i-Sec (ICAP)
■ Long Marches and Short Sprints
– A Two-Tiered Market for Hedge Fund Borrowers
– Impact on Data Distribution
– Utility or Trading Venues
■ Appendix A: Securities Lending Exchange Cheat Sheet
■ About the Author
■ About Finadium