May 2009

SECURITIES LENDING: the provider perspective

Many pension funds have made significant amendments to their securities lending programmes and, by and large, have become active again in time for the dividends season. Consequently the providers – lending agents and lending platforms – are optimistic. Nicholas Pratt reports.

“In September we did see our trading volumes dip and the value of our trades followed market trends but since the beginning of 2009 we have seen a return to the levels of early 2008,” says Sharon Walker, managing director of Equilend – an electronic and automated operating platform for securities lending.

Despite the recent rise in activity, there have been some changes in behaviour that Equilend has had to cater for with its platform, says Walker. “One thing we have done is introduce a new simplified access route for those with limited resources that can pick and choose when they access the service. We were a fully automated machine-to-machine service but now we have a simpler proposition.”

Another major change regards the requirements for agent lender disclosure (ALD), for example, is in the UK, where all lenders must be able to send and receive all data referring to lending activity by January 2010. “There is a lot of data involved – we move 3.5m records a day,” says Walker. “How lenders choose to do this is up to them and how the FSA is intending to police this is unknown. But we do have a service that we have had in place for two years since new ALD measures were introduced in the US. “We have now opened up the transmission of ALD data to the new, simpler communication form and we have unbundled it from all our other post-trade services for those that may only want to use our service for ALD.”

Another agent lender that uses an electronic blind auction process for its securities lending is eSecLending. According to senior vice president, business development EMEA Simon Lee, there has been an increase in activity in the opening quarter of 2009 with six auctions conducted totalling close to $60bn (€44.7bn) in assets and he is encouraged by “both the significant levels of the bids received and by the breadth of participation across borrowers”.

The increased demand from beneficial owners for more transparency and best execution has been a catalyst for growth for eSecLending, says Lee. “The auction model provides lenders with transparency and price discovery that is typically not available in traditional pooled programmes and allows for objective decision-making on how to best allocate portfolios for lending.”

As for the long-term prospects for securities lending, Lee is encouraged by the renewed focus on customised lending programmes and a greater awareness of counterparty risk management. “The view of securities lending as an investment function rather than operational task has also encouraged beneficial owners to more closely evaluate their programmes and explore alternative routes to market. As a result of these trends, we expect to see increased unbundling of securities lending and custody, increased use of third-party agents and the continued demand for agent-managed exclusives as they provide beneficial owners with greater control over counterparty exposures and increased transparency.”

©2009 funds europe