Citi Investor Services
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Transcript Citi Investor Services
Current Developments in the
Securities Lending Industry
Table of Contents
What is Securities Lending?
3
Market Participants
4
Industry Trends
5
Securities Lending Risks
6
Selecting a Lending Agent
7
Third Party Lending
8
Questions
What is Securities Lending?
The below outlines the basic structure of a securities lending transaction.
Securities Lending
It is the temporary transfer of securities from a lender to a borrower against collateral in the form of
securities or cash
The lender receives the full economic rights and benefits of the loaned securities
Legal Framework
Agent Lender
Sec Lending
Agreement
Lender
(Beneficial Owner)
3
Borrower
Agreements
Principals in the transaction
Borrower
(e.g. Nomura)
Who Lends? Who Borrows? Why?
The below outlines the key parties and rationale for securities lending transactions.
Lenders
Demand Drivers
Borrowers
Public Pension Funds
Prevent Market Fails
Broker Dealers
Corporate Pension Funds
Yield Enhancement Trades
Banks
Governmental Bodies
Financing Trades
Hedge Funds
Corporations
Promotes Liquidity
Banks
Support Trading Strategies
Any Large Asset Gatherer
Act as an Intermediary
Lender’s Perspective
An opportunity to generate incremental returns and gain trading insights
It offers an attractive risk/reward profile
Securities lending operates with minimal impact on a lender’s operations i.e. Agent takes care of the administration; client
buy/sell as normal
Agent Lender’s Perspective
Agent arranges and administers loans to borrowers on behalf of lenders to borrowers
Agent has opportunity to provide clients with a value-added service
A win-win business where revenues are shared which helps to align agent’s interests with lenders
4
Industry Trends
The Securities Finance industry has gone through an evolution since the global economic crisis
Back to Basics
– An emphasis on the intrinsic value of a security as opposed to maximizing the cash reinvestment
return
Transparency
– Lenders are focused on gaining a better understanding of the metrics and potential exposures in their
lending program
Risk Mitigation
– Clients are focused on ensuring their lending activity is conducted in a manner to mitigate any risks
Customized Program Management
Agent lenders ability to provide separate account management and tailor lending solutions
Decision Making
– Lending decision is more market / investment decision than custodian
5
Understanding Risks in Securities Lending
There are various risks in securities lending but there are ways to mitigate each one
6
Description
Sample Risk Mitigations
Counterparty Risk
Loss as a result of a borrower insolvency
Cash Re-Investment Risk
Loss as a result of:
– Counterparty Risk
– Interest/Rebate Rate Risk
– Liquidity Risk
– Last Man Standing Risk
Operational Risk
Potential issues arising from:
– Late Settlements
– Entitlements
– Entering new markets
Legal and Regulatory Risk
Insufficient clarity
or completeness
Risk of a regulation violation
Selecting a Securities Lending Provider
Beneficial owners should conduct a thorough due diligence process in selecting an agent lending provider
Questions institutions should address prior to beginning the search process:
Do your assets hold value in the securities lending market?
Does your Board approve lending?
Should you use an investment consultant or does your staff have the expertise to conduct the search?
Narrowing the playing field!
Beneficial Owners should take into account a wide array of considerations:
Experience and Proven track record
-Depth of Team
-Ability to extract intrinsic value
Client Service
-Understand Client Needs
-Proactive relationship management
Program Customization
-Cash/Non-Cash
-Flexibility
Transparent Reporting
-Customization
Commitment to the Business
-Invests in people, technology
-Innovation
-Strong track record
7
Risk Management
-Counterparty credit management
-Indemnification
Strong technology platforms
-Open Architecture
-Capacity
-Links to 3rd Party Custodians
-Compliance
Third Party Lending
There are number of benefits to participating in a 3rd Party Lending structure
Many lenders are utilizing multiple lending agents to provide additional sources of revenue as well as
increased diversification and benchmarking purposes
– Overall revenue potential is greater as more of the portfolio will be utilized
– A greater number of borrowers provides diversification
– Multiple agents can be compared for performance purposes
Third party lending remains transparent to the lender and requires no additional resources
Third party lending implementation does not require lender to complete a custody conversion
Third party lending does not result in any additional costs to the lender
8
Questions