Securities Lending Landscape Changing

In particular, the new study — Resetting the Roadmap: Managing in a New Securities Lending Environment for Beneficial Asset Holders — produced in conjunction with independent research and consulting firm Finadium , indicates fresh dynamics are emerging around inventory and collateral management, while the role of the agent lender is being recast, according to a press release.

The study indicates a greater attention to risk will translate into closer working relationships between asset holders and agent lenders, with the agent in some ways becoming more like an equity agency brokerage and less a utilization manager. BNY Mellon says this process is already occurring, as brokers can no longer commit large portions of their balance sheet to general collateral borrowing.

Regulators have also begun to shift their attention towards increasing transparency in the securities lending market, a trend that may be accelerated with the advent of electronic securities lending marketplaces and central counterparties, the press release said.

An increased use of non-cash collateral has resulted in benefits arising from portfolio diversification but has heightened concerns around loan pricing. While most institutions have already migrated towards a conservative portfolio or are moving in that direction, this has not meant a wholesale retreat from the market: only 31% of funds surveyed changed their securities lending behavior as a result of collateral losses.

The study finds a re-emergence of the ‘intrinsic value’ model of securities lending — a model that produces returns based upon the securities loan itself, with little incremental benefit from collateral reinvestments. However, the study notes that “intrinsic value is not for everyone” and utilizing a portfolio with a view to maximizing collateral returns “continues to be appropriate for some lenders.”

According to the press release, Josh Galper, Managing Principal of Finadium, noted: “Agent lenders are pivotal business partners for beneficial asset holders in securities lending. Going forward, they will successfully meet their clients’ needs by focusing on risk management and capitalizing on changes in market structure.”

The study draws on Finadium’s ongoing research in custody, securities lending and prime brokerage, including interviews with 34 leading public, private and non-profit funds managing nearly $747 billion in assets. The study report is here .