The securities lending market is changing at long last, and asset holders need to stay smart about managing risk and return in their programs. Some of these changes were long-expected, including the full pricing of capital charges for agent lenders and bank borrowers. Others are new, including lending directly to hedge funds. A new report from Finadium explores these topics and provides an action item checklist for asset holders.
Few things in life stand still and securities lending is no exception; the market is changing as agent lenders and borrowers react to new regulatory cost pressures. This will drive new business models, in particular as banks seek to minimize the balance sheet impact of securities lending activities. While some of these changes may be unwelcome, they offer new potentials for upside as well in both revenues and risk management. The rules of lending activity will be rewritten both formally and informally; asset holders that arrive with a degree of preparation will be most successful in the new market environment.
Asset holders may want to take actions now to protect and even perhaps grow their securities lending revenues. This does not mean expanding risk unnecessarily, but does suggest that maintaining the status quo may not result in a successful outcome in one to two years’ time.
This Finadium report reviews important topics on indemnification and counterparties for asset holders in today’s securities lending market. In particular, the report looks at the ideas of lending to hedge funds directly and lending on a CCP. While in many cases it is too early for asset holders to make decisions, now is a good time to get more comfortable with what these new routes to market mean for securities lending programs.
This report is part of the Finadium Executive Briefing series, providing briefings and analysis to the financial markets industry.
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