Securities Lending Participation Likely to Stay the Same in 2014

Despite wondering aloud if securities lending revenues justify the effort and possible risk, institutional investors are expected to continue securities lending programs at essentially the same rate as in 2013, according to a survey by Finadium.

Finadium found that firms seemed most disheartened about revenues, but some firms have specifically accepted lower revenues by choosing more conservative cash collateral reinvestment programs or more conservative acceptance of non-cash collateral. Still, 74% view revenues as important or somewhat important to their funds.

Finadium noted that as a best case scenario for 2014, interest rates would rise and shorting demand would increase, allowing institutions to generate increased revenue in their lending programs without extra collateral risk. But the worst case scenario would only be that regulations could affect market liquidity, keep lending revenues at their current, yet tolerable lows.

The survey looked at 100 institutions across North America and Europe with a total of $4.2 trillion in AuM. Finadium found that 87% of these investors participated in securities lending in 2013 and plan to do so in 2014. This is down slightly from the 89% that ran a program in 2012, but that year’s survey found that 82% of funds planned to participate in 2013, which turned out to be a low projection. Also, the total AuM available for lending increased; 5% of funds ended their programs, taking out $24 billion in assets, but 3% restarted their programs, bringing back $66 billion. Not all of a portfolio is likely to be available for lending though, so these AuM figures serve as a proxy rather than a specific amount of the securities lending supply.

For funds with AuM of over $25 billion, 95% lent in 2013, and the 5% who didn’t had not run a program for multiple years. For funds with more than $50 billion in AuM, 100% of Finadium’s sample participated in securities lending. Finadium noted that there are certainly funds with over US$50 billion in AUM that do not participate in lending, but the firm did not identify any in their public data collection or personal interviews.

The survey also found that while only four out of 27 currently have or plan to have a minimum spread on their lending activities, Finadium expects this figure to increase in the years ahead. The thought of using minimum spreads seems to be more prevalent amongst U.S. mutual funds and European UCITS funds. If enough minimum spreads were to be introduced, though, these spreads would then become the general collateral level, posits Finadium. As a result, prime brokers would source as many loans as possible from their own clients in order to avoid costs that may prohibit client trading activity.