Securities Lending
Transcription
Securities Lending
Securities Lending: Today’s Realities, Risks and Opportunities May 2016 CONFIDENTIAL Securities Lending Mechanics/Cash Flows There are two components of the securities lending transaction: 1. Loan transaction 2. Cash collateral investment management • The two distinct sides of the transaction have unique risk/return profiles • Activity is typically facilitated by a securities lending agent • • Cash collateral investment is where historical problems have arisen Cash collateral investment risk can be avoided by taking non-cash collateral (i.e. U.S. Treasuries) What Is the Opportunity? 2015 Global Revenue Source: DataLend http://www.datalend.com/infographic/infographic2015.php 2015 Global Revenue – Attribution Source: DataLend http://www.datalend.com/infographic/infographic2015.php Key Market Developments and Considerations Regulation • Affecting borrowers • Affecting lending agents • How will it affect your program? • Are interests between lenders and lending agents still aligned? Indemnification • Fee split changes are coming • Will indemnity be taken away? • Agents execute transactions in their best interests (i.e. lower capital charge) Collateral Management • Cash: who manages the cash? The agent or the asset manager? • Non-Cash: preferred by borrowers today when compared to cash § • What are the key considerations? Collateral flexibility will lead to higher revenue but evaluating risk is critical Participation Options (No Longer All or Nothing) • Only execute certain one-off trades that meet predetermined metrics • One-off pre-clearance of individual transactions • Transaction oriented participation • Lend only for “intrinsic”/ inherent lending value of securities • Set hurdle rate for loans (25 bps, 50 bps, etc.) • Capture the high value loan opportunities in the marketplace • 80/20 rule – majority of value today concentrated in small number of securities • Loan everything that has a positive spread to the cash collateral investment yield • High volume and utilization to achieve maximum revenue • Strong conviction in cash collateral strategy and approach • Maximize available revenue potential eSecLending’s Value Proposition Alignment of Interests – as the only independent firm in the market, we have no custody, borrower or asset management affiliations that can lead to real or perceived conflicts of interest with underlying fund shareholders. Our indemnification is not affected by new regulations, which is challenging traditional interest alignment for clients of large banks. Individual Program Management – all clients are managed as segregated programs; competitors use a pooled approach where large client assets are utilized to subsidize the performance of smaller, less attractive portfolios. Our approach results in higher returns and more transparency and control for clients when compared to pooled programs. Superior Lending Process – we utilize a transparent, proprietary auction process to optimize returns for clients through two distinct execution strategies. Agency Exclusive arrangements provide a guaranteed return profile while Discretionary Lending provides a daily, floating return. The only way for clients to outperform is to utilize both execution strategies. Partnership Service Model – our service model was built around the specific needs of large and sophisticated investors rather than trying to service 100+ clients. All aspects of our business are customized to specific client specifications. We innovate around client needs and the evolution of the market (i.e. our ProxyValue® product which assists investors with managing the, at times, competing priorities of revenue generation and corporate governance policies). . eSecLending Boston 175 Federal Street 11th Floor Boston, MA 02110 +1 617 204 4500 eSecLending (Europe) Ltd London 9th Floor Tower 42 25 Old Broad Street London EC2N 1HQ +44 (0) 20 7469 6000 Securities Finance Trust Company, an eSecLending company, and/or eSecLending (Europe) Ltd. (authorized and regulated by the Financial Conduct Authority) perform all regulated business activities. This material is for your private information. The views expressed are the views of the eSecLending group of companies only through the period ended 4/2016 and are subject to change based on market and other conditions. The opinions expressed may differ from those with different investment philosophies. The information we provide does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. We encourage you to consult your tax or financial advisor. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information. Past performance is no guarantee of future results. For the purposes of the FCA, this communication has been labeled a 'Marketing Communication' and as such constitutes 'Non Independent Research' under the FCA rules. It has therefore not been prepared in accordance with the legal requirements designed to promote the independence of independent research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.