It seems that the words “opaque” and “securities lending” go together well, sort of like peanut butter and jelly. At least, that’s the way it appears in the popular press. A survey of recent articles including one today in the FT are excellent examples. The trouble is, securities lending is not really that opaque any more.
Securities lending operates in an arguably very transparent marketplace for market participants, with multiple vendors providing data and reporting to all levels of the market including beneficial owners, securities lending agents, broker/dealers and the ultimate borrowers of securities. Several trading platform vendors sell their execution data commercially in a model analogous to the New York Stock Exchange selling its daily Trade and Quote (TAQ) file. Data are also available to consultants working on behalf of their institutional clients. Securities lending transparency is available on a near real-time basis, or daily, monthly or quarterly for interested parties.
From an operational perspective, the securities lending market is on as equal a footing as equity or options markets and is substantially ahead of the OTC derivatives markets. Several technology vendors as well as proprietary bank systems enforce mechanisms for daily settlement of transactions through the Depository Trust Company (DTC). Daily collateralization marks to market are almost fully automated through industry utilities in the US, as opposed to the OTC derivatives markets where a processing backlog of several days or a week may be deemed acceptable.
The ideas noted by the FT in their recent article and others like it are a bit out of date. The FT writes, “Lenders rarely disclose what shares are on loan, how much they earn from securities lending, how these revenues are shared with investors, or what collateral assets they accept as security.” While this is true on a macro scale, it is readily possible for a retail investor today, using publicly available data, to download a portfolio, determine the structure of an asset holder’s lending program, and evaluate which securities are most likely on loan. Even collateral in many cases can be determined, although this may be possible only on a general basis and not for every underlying holding. For those willing to pay a few bucks, pretty much everything they need can be available down to the individual credit ratings of collateral holdings. This is not terribly different than accessing Bloomberg for a range of data or buying access to a corporate actions database.
So, FT and others, maybe its time to find a new catchphrase for describing securities lending. Transparent would be going too far, but how about window-like with smudges, or a nice view with some small shrubs in the way? The headline I’ll be looking out for is “Securities Lending: Opaque No More.”