According to a poll taken at the IMN 21st Annual Beneficial Owners’ International Securities Lending & Collateral Management Conference in San Francisco last week, 40% of attendees said that the revenue received from their securities lending programs is more important now than it was 10 years ago, while 60% said it’s the same.
But while beneficial owners don’t think it’s become any less important, the business has become more challenging for agent lenders, and thus they have had to reexamine how to make a worthwhile return from securities lending.
For beneficial owners, ensuring their agent lender is getting them the best possible return has become harder to decipher.
Peter Bassler, managing director, business development at eSecLending, said that all agents tell beneficial owners how they beat the market, but of course it’s statistically impossible for everyone to be ahead. “Everyone knows that benchmarking is a challenge, and there’s no perfect answer,” said Bassler. One suggestion he made though was that since there are now three providers (Markit, SunGard’s Astec Analytics and DataLend), beneficial owners should consider using two data providers in case one’s data is off.
Keith Haberlin, global head of securities lending at Brown Brothers Harriman, agreed that benchmarking has its limitations.
“It’s become a little bit like kids sports where everyone’s a winner from a benchmarking perspective,” said Haberlin. “If you’re a beneficial owner, the question you really want to get at is ‘How do I know my agent lender is doing the best job possible?’ Benchmarking is a part of that; it’s not the whole picture. I think there are other ways to get at that answer, such as asking for references, really getting the agent to explain their trading methodology and how they look to outperform the market, and if you’re big enough the best way is to use more than one lending agent so you can compare performance.”
From the agent lenders’ perspective, the business has become more difficult as the cost of capital increases and as interest rates remain low. As a result, lenders are looking to diversify their programs in a number of ways, such as looking at different trade structures like equity swaps, expanding into new markets (such as eSecLending looking to expand in Taiwan and Malaysia). The actual lending chain though might shorten as well, with more direct loans to hedge funds.
For specials trades and others that provide higher returns, Haberlin noted that BBH is working on presenting “those opportunities to clients that give them more confidence to step into those trades,” namely by providing more information including pre-trade transparency, and ultimately providing the beneficial owner with more control.
Agent lenders at IMN also discussed whether the industry needs to be repriced to survive, and most agreed that agent lenders will need to raise their prices at some point.
“There are some who will continue do it at crazy fee splits, but I think over time, efficient use of capital will catch up to every firm,” said Haberlin.
Paul Wilson, global head of Agent Lending Product and Portfolio Advisory, Investor Services, at J.P. Morgan, noted that many firms are being self-destructive with the prices they’re putting in recent proposals, as firms have known about regulatory changes for the last few years. So to offer unsustainable prices now and reprice later does not make sense, he said.
Agent Lenders Examine Performance and Fees at IMN Conference
According to a poll taken at the IMN 21st Annual Beneficial Owners’ International Securities Lending & Collateral Management Conference in San Francisco last week, 40% of attendees said that the revenue received from their securities lending programs is more important now than it was 10 years ago, while 60% said it's the same.