Free from Finadium: Securities Lending, Market Liquidity and Retirement Savings: The Real World Impact

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. This report is available for free download courtesy of State Street.

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.

Download the full report here.

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