Securities Lending: It’s time for industry change
by Sunil Daswani, Global Head of Securities Lending
A handful of securities lending agents have historically dominated the securities lending marketplace with standardised programmes. Today’s dynamic markets are wrapped with regulation that is pushing for transparency and for clearly explained risks that align with revenues. In light of this, every beneficial owner needs the flexibility to run an individualised programme that addresses its unique securities lending requirements. An industry shift is imperative to address evolving market needs. Now is the time for change.
The cost of scale efficiency: a need for greater customisation
Over the years, securities lending has become a volume-driven business. Securities lending agents fueled market growth by mobilising large pools of securities across their clients and making them available to borrowers. This helped to broaden market participation to include relatively smaller asset owners while bringing efficiencies to agents and their borrowers which kept programme administration costs low. However, as a tradeoff for scale efficiency, a one-size-fits all approach can no longer dominate the market.
Drivers of change
Today, lendable value across all asset classes exceeds USD27 trillion, an all-time high, while on-loan balances have reached USD2.6 trillion, remaining flat in absolute values. Securities lending is now a mainstream activity for many institutional investors, who recognise the value of offsetting custody and administrative costs and enhancing portfolio performance by generating incremental, fee-based revenue in a relatively low-risk manner.
Securities lending has become increasingly integral to financial markets as a source of liquidity and financing as well as an efficient price discovery mechanism. Regulators have been promoting transparency and alignment between market participants to reduce market risk and increase efficiency. They seek to harness data towards this end, such as with the implementation of the Securities Financing Transaction Regulation (SFTR) reporting that commenced in 2020.
Following the global financial crisis starting in 2007 and 2008, many institutional investors also heightened their focus on the risk management aspect of their securities lending programmes. Lenders differ in their emphasis on operational risk, risk controls around borrowers, collateral management, reinvestment risks, and concerns such as active participation in proxy voting to promote good corporate governance. Prudent risk management remains a key focus of lenders in structuring and managing a securities lending programme.
Today’s supply of lendable securities is at an all-time high, and demand is relatively flat. Therefore, investors seek alternative routes to market and ways to enhance revenue.
However, investors have a broader set of lending criteria beyond risk control and market performance. For example, motivations around sustainable investing must carry through from investment policies to securities lending practices. Even so, investors define differently their approaches to environmental, social, and governance (ESG) policies. As a result, one size does not fit all. A diverse set of lender objectives and requirements necessitate bespoke solutions that give institutional investors flexibility in structuring their securities lending programmes.
One-size does not fit all: A model that supports market evolution
Standard Chartered’s agency securities lending service supports the industry change that we envision. Our model offers bespoke securities lending solutions, which can achieve greater transparency and higher risk-adjusted returns while more closely aligning with a lender’s interests compared to standardised programmes that pool assets across lenders.
The basis for our approach is individualised programmes that allow lenders to choose an à la carte set of options to ensure that their investment policies and practices align with loaned securities, choice of borrower, and rules around collateral. Lenders can more granularly manage risk and gain greater transparency into rates and performance.
This unique securities lending model combines the strengths of Standard Chartered and our partner eSecLending, the well-respected independent securities lending specialist with its flawless track record and over 20 years of experience:
- As our engine to deliver securities lending as a product, eSecLending’s existing infrastructure delivers front-to-back-office services, including the use of auctions; individual, segregated client programmes; and segregated collateral accounts in a client’s name. Disclosing lending at the point of trade adds desirability to our counterparties, who can select lenders using smart buckets that allow them to understand the required cost of capital and how it may vary from one lender to another.
- Standard Chartered provides the financial strength and stability that some beneficial owners require when lending their securities in terms of indemnification. Our footprint, including experience in frontier markets, enables us to assume risk and provide liquidity in many markets.
Lenders need not be clients of Standard Chartered. The custody-agnostic approach enables lenders to easily access securities lending capabilities through their existing custodians. Broad availability of the service aims to support market evolution beyond the status quo.
Harnessing technology and data: customisation to scale
Bespoke solutions need not sacrifice scale efficiencies. Today technology enables our industry to deliver customised programmes to scale through automation and digitalisation, and in the future distributed ledger technology will also contribute to this.
The application of emerging technology is key to our model. For example, we will use artificial intelligence and machine learning to harness data beyond benchmarking performance to provide greater transparency and flexibility to lenders.
Now is the time for industry change
More than ever there is a need for the industry to accommodate the diversity of interests among securities lenders. Varied client needs necessitate greater visibility and flexibility in the structuring and management of securities lending programmes.
It is time to challenge the industry status quo. The ability to create value-added services that provide greater choice and control is key to market evolution.
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