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.