April 2020

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The COVID-19 crisis will soon create an earnings problem for US mutual fund and ETF managers that receive cash in their securities lending programs and reinvest that cash in their own collateral pools. For at least 28 of the top US fund complexes analyzed, these collateral pools generate fees and assist in liquidity generation for their broader cash management activities.

In a high interest rate environment, fund complexes can charge fees and ensure that their clients earn a profit on cash funds. In a low interest rate environment, charging even modest fees can be difficult if not impossible. We have already seen money market funds reduce or waive fees in the last round of near-zero interest rates, and expect they will be forced to adopt the same policy this time around.

This report quantifies how much money is at stake for US fund complexes in their securities lending cash collateral fees. We profile how many funds have exposure and which fund complexes are relatively immune from the problem due to program structure. Our source of data is Finadium’s ongoing collection of US mutual fund and ETF filings on their securities lending activities with the SEC, and additional data gathering on the reported cash collateral vehicles of fund complexes.

The lessons in this report should be useful to any securities lender reliant on fees for the management company to help sustain their program. Industry participants — including banks, investors and regulators — may find that the revenue shortage that fund complexes will soon face could impact their overall business activities.

Table of Contents

  • Executive Summary
  • US Fund Fee Structures for Securities Lending Programs
    • – Methodology
  • Revenues Earned on Cash Collateral Pools
  • Implications for 2020-2021
    • – Market Participation
    • – How Else Can Funds Earn Revenues
  • About the Author
  • About Finadium LLC

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