20.2 Percent of Institutions Have Left Securities Lending Since 2008: Finadium
January 26, 2010
Some 20.2 percent of US institutions have permanently left the securities lending market since 2008, a “much lower figure than has been reported in the popular press,” according to a January 25 report from Finadium, a securities an investments research firm based in Concord, MA.
Alternatives to traditional routes for securities lending, including electronic markets and single stock futures, are on the radar screens of many institutions for the first time, according the report, titled “Institutional Investors on Securities Lending, Collateral Management and Custody in 2010.”
The report, based on data from institutional investors and pension plans, acknowledged that “in securities lending and collateral management, 2009 saw the harsh realization that many funds had lost money, in some cases substantial sums, in their collateral management programs.”
But while the credibility of the securities lending industry has been “damaged for the time being,” securities lending managers who “pay attention to their programs” are now earning strong returns relative to the assets lent, it said: “While the volume of loans this year is much lower than in 2007 or 2008, mangers that have continued lending have often seen spreads in the 1000 to 3000 basis points range for what are generally considered to be safe S & P 500 stocks.”
Securities lending is an investment strategy in which investors make short-term loans of their securities to generate incremental revenues from their portfolios. The loan results in a transfer of title/ownership to the borrower who is obligated to return the same type and amount of securities.
While most institutions suffered losses in 2009, some have seen a return to profit and only a quarter predicted that their lending revenues would fall in the next two years, the report added. A significant majority felt that securities lending revenue is “very or somewhat important” to their fund, while an even higher proportion felt that securities lending has become an “investment function,” rather than a back office operation.
Finadium also found an increase in funds intending to bundle their custody and securities lending operations. Collateral management was seen as something that could be carved out to a third party or potentially taken in-house.
“With the credit crisis largely behind them, institutional investors are looking closely at business practices in securities lending, collateral management and custody, and wondering how they can be improved,” the report said. “Risk has trumped return as the primary concern, but along the way institutions are evaluating key issues such as the bundling of services, how cash collateral is reinvested and what kinds of fee structures are most appropriate in securities lending.”
