A combination of the acceptance of securities lending by institutional investors, reduced risk and greater regulatory attention is keeping asset managers in the securities lending market, according to a survey by Finadium.
Among the 30 North American and European asset managers surveyed, 89% are lending, up from 84% last year. Further, none of the firms with securities lending programs had ended them, and several non-lending managers were considering restarting. Looking out over the next two years, 96% of firms were certain they would be lending.
The percentage of asset managers lending only for revenue generation grew from 80% last year to 86% this year, while interest in liquidity generation declined proportionately. Some managers noted they could turn quickly to securities loans for liquidity if needed, but didn’t see demand at this time.
Since the logical objective is to produce high returns for the institutional investor with low collateral exposure risk brought on by a securities loan, asset managers told Finadium that, intuitively, most loans should be specials. However, the survey found 68% of firms willing to lend both general collateral and specials, while 27% of programs were specials only. A threshold spread of 25 bps was seen as ensuring a true specials only program, although firms had also placed minimums of 50 bps and 100 bps before a loan could go out.
Securities lending remains an ancillary business; it is not the alpha generation of primary investing but rather a secondary means of generating revenues, Finadium notes. Still, lending revenues are valued: 38% of respondents said that lending revenues were important in 2016, up from 33% the prior year.
On the client side, asset managers report that there is a direct correlation between the size of the client and their interest in securities lending revenues. This is often because large clients understand the potential value of their assets and are also lending through their own portfolios and with other asset managers. A new trend in the U.S. is increased interest in securities lending by defined contribution (DC) retirement plans, the survey found. Finadium says this is a long-expected transition by DC plans, which often require additional education to help human resource and other administrative plan managers understand the nature of the transaction.
U.S. asset managers expect the onset of money market reform this fall to create further changes to cash collateral reinvestment practices. Some fund managers will wind up selecting an ultraconservative bond fund for cash reinvestments because they have not found a legal way to do anything else.
Forty-seven percent of managers think that transparency rules in securities lending is positive for the markets.
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