Investment funds are looking for new ways to boost income
from their securities lending business as adverse regulatory
effects continue to hit the practice nearly a decade on from
the financial crisis.
Many of the largest asset owners in the world, including
pension plans, foundations and asset managers, loan out
securities that would otherwise sit idle, earning a fee in the
In most cases banks, known as agent lenders, manage the
trades by dealing directly with borrowers such as prime brokers
acting on behalf of hedge funds.
The industry suffered significantly in the wake of
2008’s financial crisis and has struggled to shake
off negative perceptions since pockets of lenders experienced
losses and impairment in cash reinvestment products.
Most funds have since re-engaged in the practice after
improving their understanding of the business and strengthening
their risk management teams. Despite struggles, IHS Markit
statistics show asset owners and their agents generated over
$8bn worth of revenues from lending securities in 2016 - the
best result in four years.
However tax changes, attempts to increase transparency and
efforts to curb shadow banking continue to put pressure on
lenders and borrowers combined, impacting demand and forcing
participants into a constant state of adaptation.
Leading figures from the US market (the industry's largest)
will gather in Florida this week to discuss the outlook for the
business. Tim Smollen, global head of Deutsche
Bank’s agency lending business, believes
innovation will be the main focus.
"There will certainly a lot of discussion around regulations
and markets but interestingly we have been asked by a large
number of beneficial owners to try to focus our panel
discussions on ideas for innovating their programs," Smollon
told Global Investor/ISF.
"While regulations and money market reforms have resulted in
many clients seeing their balances and revenues fall there are
ways that beneficial owners can evolve their programs to
continue to capture their share of revenues.
"For example, for the first time in many years I think we
will have a lot of discussion on cash collateral reinvestment
options especially for clients that relied on money funds for
many, many years.
"In terms of regulations, clients clearly want to understand
the impact that regulations will have on their program but
again this conference is being asked to focus on ways to move
Lance Wargo, North American head of agency lending at BNP
Paribas Securities Services, believes the
securities finance industry will go through a
"transformation process" in 2017.
"We expect the securities lending space continue to grow
beyond an average $1.8trn of securities out on loan, but the
winners and losers will be distinguished by clear,
well-thought-out objectives in their securities lending
programs," Wargo told Global Investor/ISF.
"If the purpose is for incremental revenues with little to
no risk, then a limited number of borrowers and a government
securities-only cash reinvestment pool might be the best
"If the objective is to beat a benchmark, then the lender
may seek opportunities from both general collateral and special
securities, as well as a more comprehensive reinvestment