Finadium Research Report

Securities Lending Programs for Fully Paid Retail Investments

September 2007

Finadium, formerly Vodia Group, has released a new report on securities lending programs for retail investors with fully paid, non-margin accounts. With over US$9 trillion in holdings, retail investors are looking, cautiously, at securities lending to generate additional portfolio returns while minimizing risk. New programs at the largest brokers are seeking to facilitate these loans, with important consequences for prime brokers and the securities lending market.

Finadium has ranked nine top retail brokers and two additional prime brokers by their ability to deliver cost-effective retail inventory to hedge funds and other short sellers. The results suggest that with an expanded retail securities lending program for fully paid assets, increased demand from hedge funds and 130/30 managers would not unduly affect pricing in securities lending. It also suggests that Merrill Lynch, Fidelity and Citigroup, the big three retail brokers with prime services divisions, have opportunities to increase their prime market share.

This report looks at retail fully paid securities lending market both as they exist today and what it could become tomorrow. We review the attitudes of retail investors, discuss regulatory conditions that hinder or hamper these programs and recommend how programs could be safely expanded.

According to Josh Galper, Managing Principal of Finadium and author of the report, “retail asset holders have over $3.6 trillion in fully paid US equities, of which $146 billion is in hard to borrow equities. Adding these hard to borrow assets to the pool of outstanding US equity securities loans would increase supply by 20%, which would come just in time as hedge funds and 130/30 managers are increasing demand. Without new supply, costs for short sellers will increase leading to capacity constraints on hedging strategies.”

The following brokerages were reviewed for this report:

• Bear Stearns
• Charles Schwab
• E*Trade
• Fidelity • Goldman Sachs
• Merrill Lynch
• Morgan Stanley
• Smith Barney (Citigroup) • TD AMERITRADE
• Wachovia / A.G. Edwards

This report is 39 pages with 21 exhibits and figures.

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■ Executive Summary
■ The New Inventory Pool
– The Impact of New Inventory in the Securities Lending Marketplace
– Methodology
■ Retail Brokers and Incentives for Fully Paid Securities Lending
– Sizing Retail vs. Institutional Securities Lending
– Ranking the Brokers
■ Risk and Returns: Why Should Retail Investors Bother with Securities Lending?
– Protecting the Retail Client Relationship
■ The Mechanics of Retail Lending Programs
– A Conservative Regulatory Environment
■ Supply and Demand for Retail Inventory
– The Big Hurdle Ahead
■ Appendix: Summaries of Broker Retail Lending Practices
■ About the Author
■ About Finadium


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