Finadium: Institutions on Seclending and Collateral Management

Finadium has released a new research survey, “Institutional Investors on Securities Lending and Collateral Management in 2014: A Finadium Survey.” This report presents the findings of our 7th annual survey of the plan sponsor, pension scheme and sovereign wealth fund sector.

Finadium’s 2014 survey of institutional investors is a study of balancing current risk/return mandates with expectations of future market change. While no singular regulation itself will reshape securities lending, a combination of rules across multiple jurisdictions will make lending more or less profitable, encourage participants to stay in or leave the market, and affect the long-held importance and provision of counterparty default indemnification. This report is a prequel to the actual change as new institutional thinking emerges including the interest of institutions to take on additional credit and maturity trades, also known as Shadow Banking.

This study relies on two pools of data. The first is a proprietary survey of institutional investors in North America and Europe conducted in late 2013, including public and private retirement plans as well as sovereign wealth funds. The second is the annual reports of US public plan sponsors. In total, we spoke with or gathered data from 100 institutions managing US$4.2 trillion in assets. The results of the study show revenues, fees and forward-looking expectations from a cross-section of institutional investors in the securities lending market. The data also help explain how institutional investors expect to change their programs going forward, and what this means for agent lenders, bank counterparties, hedge funds and market makers.

This yearʼs survey reveals some new thinking about cash collateral reinvestments and non-cash collateral acceptance, with implications for borrowers, repo dealers and money market investors. While each institution has its own parameters for securities lending collateral, market leaders are working to restructure and possibly broaden their collateral rules to avoid pitfalls and take advantage of emerging trends. This is a complicated topic and one made more sensitive by 2008 losses in cash collateral accounts.

Alongside possibly diversifying cash and non-collateral acceptance, institutions are aware that their unique positioning in the investment industry means that they could take on Shadow Banking activities that banks are reducing, with substantial profit opportunities. This may include acquiring portfolios of assets that would otherwise consume high amounts of bank capital or engaging in trades as a liquidity provider where previously a bank would have controlled the product. Institutions again face questions about risk versus return, but in this case, a potentially large market opportunity is beckoning.

This report is for institutional investors and their service providers to provide insights into the market environment for 2014. For institutions, the report offers a peer-based analysis of securities lending and collateral management programs including the risks and value of lending, whether for revenues or contingent liquidity, as emerging regulations change the market. For service providers, the report offers a candid look at the thinking of the large and important institutional investor client base. This report focuses especially on how institutions see themselves and their peers fitting into the securities lending landscape over the next two to three years.

Visit the report web site for more information and to read the table of contents.

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