November 2015

This report has been made publicly available courtesy of State Street. Download the full report here.

Securities lending plays a relatively unknown but vital role in financial markets. Behind the scenes, it provides liquidity for trading and settlement, reduces volatility and greatly assists in the process of price discovery both on exchanges and in bilateral markets. It also produces helpful incremental income for retirement plans and other long-term investors, which is used to reduce costs and improve returns.

Agent lenders, primarily large custody banks, play an important role in securities lending by facilitating access to pools of investment assets held by institutional investor clients. Their ability to continue to intermediate securities lending is therefore crucial to the health of financial markets. This, in turn, benefits domestic economies by facilitating capital formation, risk transference and the long-term accumulation of wealth. In an era of complex regulatory change, it is important that the benefits of securities lending are well-understood and appropriately preserved.

This paper looks at the contributions of securities lending to financial markets with an emphasis on transaction costs, market liquidity and incremental revenue. We identify US$61 billion in increased annual investor costs that would result from a loss of securities loans on major international equity markets if securities loans, and hence short selling, were no longer available. As an important addition to market liquidity and operational efficiency, securities loans help create a reliable, trustworthy marketplace for investors. The annual reports of US pension plans and global investment fund complexes demonstrate that securities lending contributes consistent and uncorrelated basis point returns to investors, including during stressed market conditions. Policy makers should be aware of the broad consequences of existing and proposed regulations on the ability of banks to continue to support securities lending activities.

This report is 26 pages with 10 exhibits.


? Why Securities Lending Matters
– Sizing the Market
– The Uses of Securities Loans

? Securities Lending, Market Efficiency and Economic Growth
– Evidence on Equity Market Liquidity and Short Selling
– Efficient Markets and Economic Growth

? How Much Do Investors Earn from Securities Lending?

? Where Is the Risk in Securities Lending?

? Regulation and Credit Risk for Custody Banks
– Could Securities Lending Move to the OTC Derivatives Markets?

? Securities Lending Is an Important Part of Financial Markets

? About the Author

? About Finadium


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