Current Developments in the Securities Lending Industry.
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Transcript of Current Developments in the Securities Lending Industry.
Current Developments in the Securities Lending Industry
Table of Contents
What is Securities Lending?3
Market Participants
4
Industry Trends 5
Securities Lending Risks 6
Selecting a Lending Agent 7
Third Party Lending 8
Questions
What is Securities Lending?
Securities Lending
It is the temporary transfer of securities from a lender to a borrower against collateral in the form of securities or cash
The lender receives the full economic rights and benefits of the loaned securities
The below outlines the basic structure of a securities lending transaction.
Legal Framework
Principals in the transaction
Lender(Beneficial Owner)
Borrower(e.g. Nomura)
Agent Lender
Borrower Agreements
Sec Lending Agreement
3
Who Lends? Who Borrows? Why?
Lender’s Perspective
An opportunity to generate incremental returns and gain trading insights
It offers an attractive risk/reward profile
Securities lending operates with minimal impact on a lender’s operations i.e. Agent takes care of the administration; client buy/sell as normal
The below outlines the key parties and rationale for securities lending transactions.
Lenders
Any Large Asset Gatherer
Public Pension Funds
Corporate Pension Funds
Governmental Bodies
Corporations
Banks
Demand Drivers
Prevent Market Fails
Yield Enhancement Trades
Financing Trades
Promotes Liquidity
Support Trading Strategies
Act as an Intermediary
Borrowers
Broker Dealers
Banks
Hedge Funds
Agent Lender’s Perspective
Agent arranges and administers loans to borrowers on behalf of lenders to borrowers
Agent has opportunity to provide clients with a value-added service
A win-win business where revenues are shared which helps to align agent’s interests with lenders
4
Industry Trends
Back to Basics
– An emphasis on the intrinsic value of a security as opposed to maximizing the cash reinvestment return
Transparency
– Lenders are focused on gaining a better understanding of the metrics and potential exposures in their lending program
Risk Mitigation
– Clients are focused on ensuring their lending activity is conducted in a manner to mitigate any risks
Customized Program Management
Agent lenders ability to provide separate account management and tailor lending solutions
Decision Making
– Lending decision is more market / investment decision than custodian
The Securities Finance industry has gone through an evolution since the global economic crisis
5
Understanding Risks in Securities Lending
There are various risks in securities lending but there are ways to mitigate each one
Description Sample Risk Mitigations
Counterparty Risk Loss as a result of a borrower insolvency
Cash Re-Investment Risk Loss as a result of:
– Counterparty Risk
– Interest/Rebate Rate Risk
– Liquidity Risk
– Last Man Standing Risk
Operational Risk Potential issues arising from:
– Late Settlements
– Entitlements
– Entering new markets
Legal and Regulatory Risk Insufficient clarity or completeness
Risk of a regulation violation
6
Selecting a Securities Lending Provider
Questions institutions should address prior to beginning the search process:
Do your assets hold value in the securities lending market?
Does your Board approve lending?
Should you use an investment consultant or does your staff have the expertise to conduct the search?
Narrowing the playing field!
Beneficial Owners should take into account a wide array of considerations:
Beneficial owners should conduct a thorough due diligence process in selecting an agent lending provider
Client Service-Understand Client Needs-Proactive relationship management
Transparent Reporting-Customization
Strong technology platforms-Open Architecture-Capacity-Links to 3rd Party Custodians-Compliance
Experience and Proven track record-Depth of Team-Ability to extract intrinsic value
Program Customization-Cash/Non-Cash-Flexibility
Commitment to the Business-Invests in people, technology-Innovation-Strong track record
Risk Management-Counterparty credit management-Indemnification
7
Third Party Lending
Many lenders are utilizing multiple lending agents to provide additional sources of revenue as well as increased diversification and benchmarking purposes
– Overall revenue potential is greater as more of the portfolio will be utilized
– A greater number of borrowers provides diversification
– Multiple agents can be compared for performance purposes
Third party lending remains transparent to the lender and requires no additional resources
Third party lending implementation does not require lender to complete a custody conversion
Third party lending does not result in any additional costs to the lender
There are number of benefits to participating in a 3rd Party Lending structure
8
Questions