Securities lending is getting another look lately. After virtually disappearing following the 2008 financial crisis, the practice is gaining popularity again as companies search for return.
Securities lending of course refers to the temporary transfer – or lending – of securities held by one party to another in exchange for cash collateral. That collateral can then be reinvested to produce income for the lender.
Some corporates are again considering securities lending as a way to enhance the near-zero returns they have endured for the past several years. Prior to 2008, securities lending was used by many large corporations as a way to put idle securities to use and gain some additional yield. However, during the credit crisis, the unprecedented market conditions highlighted the significant risks that can affect securities lending.
Much of the negative impact came from the sudden collapse of counterparties like Lehman Brothers and Bear Stearns, which left many securities lending programs at a loss. Much of the fallout stemmed from losses and illiquidity in the cash-collateral pools and, in the cash of Lehman’s bankruptcy, its failure to return the securities it had borrowed. As a result of these concerns, many large institutional investors suspended their securities lending programs, while others changed or tightened their collateral re-investment guidelines to reduce risk.
Many online portal providers who specialize in securities lending services are making upgrades to their systems to improve timeliness and transparency of data to comply with the new rules as part of the Dodd-Frank regulations. Based on the results of the 2012 Global Custodian Securities Lending Survey, some of the top securities lending providers include:
BNY Mellon – BNY Mellon’s web-based collateral management portal, AccessEdge, connects dealers with investors to conduct collateral transactions in a secure environment. Their latest upgrade provides an interactive dashboard, enabling clients to more easily view their collateralized status in real-time. The dashboard displays a client’s aggregate collateral exposure, including the number of unmatched, mismatched or instructions currently open.
Citi – In response to these transformed market conditions and building on their long-standing experience of delivering third-party lending solutions, Citi has developed the next generation of securities lending, called OpenLendSM. OpenLend is an open-architecture solution that provides boutique customized services designed to enhance portfolio performance with a global branch network, open architecture, robust risk management and real-time controls, flexibility, innovation, dynamic reporting and overall market leadership.
Deutsche Bank –Deutsche Bank operates one of the world’s largest specialized agency securities lending programs offering institutional clients a comprehensive and efficient product for generating additional return on their fixed income and equity portfolios. The service is operated by one of the most experienced and respected teams in New York, London, Frankfurt, Hong Kong and Singapore.
J.P. Morgan – J.P. Morgan’s Agency Clearing, Collateral Management and Execution (ACCE) business has introduced daily portfolio reconciliation for its derivatives collateral management clients. The product, available through ACCE’s TriOptima partnership, enables clients to use secure FTP technology and exchange trade files through the triResolve service to identify valuation differences, trade booking errors and other potential discrepancies, which lessens the likelihood of disputes and helps accelerate the resolution of any potential queries.
State Street – As one of the world’s most experienced lending agents providing both custodial and third-party lending, State Street offers the individualized service, client-facing technology and commitment to transparency you’re looking for.
The combination of improved counterparty risk analysis this is being done by most corporate treasury departments, along with the technology improvements in timing and transparency made available by program providers, seems enough to give some large corporates the comfort they need to swim in the securities lending pool again. That is, at least for now.