While securities lending can be used as a way for beneficial owners to generate extra revenue, the activity can also be used as a treasury function, and with revenue down in recent years, this treasury function could emerge as a more common reason for engaging in the practice.
At the IMN 20th Annual Beneficial Owners’ International Securities Lending Conference in Austin, Texas, a panel on using securities lending as a cash source sparked markedly more interest from beneficial owners based on the level of audience participation compared to other sessions. The enthusiasm suggested that while this practice may not be so common yet, it could be a way forward for the industry.
Matthew Steinaway, senior managing director at State Street Global Advisors, gave an example of how for one of State Street’s clients that desired leverage, securities lending was a less expensive way to receive financing. Historically this particular fund relied on a line of credit at a bank, and the fund kept this bank liquidity line open as a contingent line of credit, and an important risk mitigant, Steinaway stressed. Yet the fund would use their box of assets for securities lending as their first line of financing to keep costs down.
In addition to Steinaway, all the panelists noted that while lending assets can be a cheaper way to receive financing, the practice carries more risk, and thus participants need to be mindful of how they engage in this activity. “Over the years, misunderstandings or lack of education has led to several people down the wrong path,” said Mike Saunders, head of trading and investments, securities lending, BNP Paribas Securities Services. “When it comes to using assets to generate liquidity, participants need to to determine what level is fair in the marketplace and what kind of assets can be used to generate that cash.”
Josh Galper, managing principal at Finadium, noted that one of his company’s surveys found that 4 out of 27 pension plans and sovereign wealth funds were thinking of using securities lending as a liquidity tool, so the practice does have a ways to go before it becomes mainstream.
But panelists noted that with the increased need for collateral becoming more prominent over the next few years, this could be the push that leads to securities lending being used as more of a liquidity tool.
Securities Lending as a Source of Financing Could Be on the Rise
While securities lending can be used as a way for beneficial owners to generate extra revenue, the activity can also be used as a treasury function, and with revenue down in recent years, this treasury function could emerge as a more common reason for engaging in the practice.