Beneficial owners are increasingly being offered different
fee splits depending on whether their programme is indemnified
– but securing a better fee split may not be
worthwhile if the institution is not able to manage risk
The amount of programmes that are not indemnified remains
small – at the at the IMN US Beneficial Owners
conference session on the topic only two of 60
representatives did not have it – but the increasing
balance sheet cost of providing it means some agent lenders
are applying pressure to go without it.
However, indemnification – agent lenders protecting
beneficial owners against losses from their lending programmes
– remains a key component for many.
William Locke, chief risk officer at eSecLending,
which has insurance-based indemnification, said that
indemnification includes a package of risk management tools
rather than just guarantees.
Each agent lender will have different processes but, speaking
for his firm, Locke noted that it includes assessing credit
risk of counterparties – approvals, due diligence,
continuous reviews – monitoring market signals such
as CDS spreads and share prices, daily interactions with
counterparties and "talking to the Street".
"You incorporate all of that in and think ' how comfortable
am I expending credit to that counterparty? And, you
incorporate all that in to market risk management –
what are you lending and what collateral are you taking
He noted that everything is viewed through a "risk lens" and
continuous stress-tests are carried out: "This is all behind
indemnification, its skin in the game for anyone offering
indemnification. Without indemnification, you need to give
serious thought to whether you have the resources and
capabilities to have a comprehensive approach to handling your
Lance Wargo, North American head of agency
securities lending, BNP Paribas, warned that the Lehman crisis
exposed the importance of being able to act quickly to avoid
losses in extremely volatile market conditions.
"There were some problems because not all agent lenders had
good collateral liquidation programmes," he said. "There is
definitely potential for losses on the lending side."
BNP Paribas offers traditional balance-sheet-based
indemnification on its lending programmes.
"Now we are talking about having a two day stay protocol in
effect," said Wargo. "Then, you are going to have to wait and
you are taking a bigger risk than people think."
Brian Yeazel, managing director - fixed income,
Northwestern Mutual, added: "There have been a number of
changes with Dodd-Frank. Even now, if you lend to a SIFI
[systemically important financial institution] no matter what
agreements you have they could be put on hold for a period of
"That is where you may run into a period of wanting
indemnification whether for execution risk – you
can’t get your securities back on time
– or even loss – from being
Northwestern Mutual self-indemnifies, as it runs its own
programme and has expert credit personnel internally. "The way
we manage our programme right now, we can’t
indemnify it. But we do evaluate the risks internally, and are
comfortable with those risks."
James Vance, vice president and treasurer, Western
& Southern Financial Group, said: "If you have
indemnification, you should still attempt to have as much risk
control as possible – it is not designed to completely
absolve any beneficial owner."