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