The securities lending industry is generating more than US$1 trillion in revenues per year, but those revenues come with a cost: risk.
Boston, MA, May 13, 2009 – A new report from Aite Group, LLC provides an introduction to securities lending. The report discusses market trends, and reviews the risks and benefits of securities lending to both beneficial owners (those who lend out securities) and agent lenders (the intermediaries that match owners and borrowers).
The securities lending industry is in the midst of a great transition. Securities lending as a collateralized transaction may once have been considered a relatively safe activity, but the default of Lehman Brothers, volatile markets, short-selling bans, and a credit crisis modified assumptions of safety. After the September 2008 Lehman Brothers crisis, some beneficial owners halted their programs and, securities lending volumes have not yet returned to previous levels.
"Securities lending is a front-office investment strategy overlay to the portfolio and can generate meaningful returns," says Denise Valentine, senior analyst with Aite Group and author of this report. "Nevertheless, any market participant who believes the securities lending market is insulated from market events, or that clients will continue with the status quo, is in denial."
Today, the securities lending market has the potential to be transformed by the emergence of electronic platforms, including LendEX, AQS and SecFinex. The market needs to gain comfort in these platforms' ability to attract liquidity, believe the pricing is competitive and that the platforms demonstrate operational excellence.
"Market participants wishing to consider alternatives from traditional routes may find these electronic platforms worth their while," Valentine observes. "The platforms launching over the next few months are more than likely just the first generation. As was the case for front-office trading staff a few years ago, transaction automation and vendor choice is coming to a wider population in securities lending."
This 38-page Impact Report contains eight figures and nine tables. Clients of Aite Group's Institutional Securities & Investments service can download the report.