Institutional investors are wondering whether current revenue split practices in securities lending should be replaced by an asset under management fee, according to a survey by Finadium.
The survey,Institutional Investors on Securities Lending, Collateral Management and Custody in 2010, is based on data collected from 92 public pension plans with $2.01 trillion in assets, and supplementary interviews with 25 institutional investors managing $759.4 billion in assets.
Securities lending programs often contain a split in revenue generated from securities lending activity between the custodian and the beneficial owner. However, securities lending revenue has decreased dramatically in 2009 due to lower spreads and volumes. Securities lending fee revenue for BNY Mellon totalled $29 million in the fourth quarter of 2009 compared with $187 million in 2008. For State Street, securities lending revenue fell 75% from $329 million in Q4 2008. As a result, institutional owners may be considering a more guaranteed revenue stream rather than relying on income generated from securities lending and collateral reinvestment.
The survey also found that post-crisis, 86% of institutions see securities lending as an investment function as opposed to a back office process.
75% of funds report that securities lending revenue is very or somewhat important to their Boards or senior managers, and 45% of funds surveyed planned to bundle securities lending and collateral management in their next bidding process for a custodian, down from 82% the prior year.