Achieving both a healthy and a responsible investment return can be a major challenge today. Yet there are still plenty of opportunities available, although all too often we assume they involve too many risks. This stigma affects securities lending. But in our opinion, this isn’t justified because if you approach this in the right way you can generate extra income while minimizing risk. At the same time, you can recall securities at any time while also continuing to comply with your ESG policy.
26 Mar 2019
What is securities lending?
Securities lending is a relatively easy way for investors to generate additional returns on stocks that are not being sold or that do not fit in with the long-term investment policy. And the returns generated are in addition to the current dividends and price gains you already receive.
Securities lending is the temporary lending of securities, whereby legal ownership is transferred to the borrower. However, economic ownership remains with the lender throughout the entire lending period. In other words, if you invest in shares, you can lend them to third parties while retaining the beneficial ownership. These shares are lent out against the payment of a "loan fee" and you receive security in the form of non-cash collateral.
The global securities lending market (loan value) has a value of € 1.8 trillion, one third of which comes from Europe. This is the distribution between the different asset classes:
- 44% Government bonds
- 44% Shares
- 12% Credits & other
The securities lending market continued to grow in 2018, particularly in the area of non-cash government bonds.
Why do investors borrow?
In today's market, with low interest rates, yields alone are often insufficient to support long-term strategies. Securities lending can be a good addition to your investment strategy, whereby you can achieve extra returns with a responsible level of risk. Many investors engage in securities lending, including the European Central Bank, which lends out the bonds it has bought.
Here are three reasons for switching to securities lending:
- Extra return
For institutional investors, securities lending is a good tool, with a low risk profile, to generate additional returns on securities that remain in the portfolio for a long period of time. By lending them to carefully selected parties, you can generate additional income, while the securities lent out are available on demand at any time.
- Liquidity and risk management
Assets are borrowed to make the settlement process run smoothly. Loaning securities provides more liquidity. It also has a risk mitigating effect. On the one hand, extra return is generated in a responsible manner; on the other hand, investment strategies can remain unchanged and you can meet the margin requirements at all times.
- Implementing legislation and regulations
When securities are lent out, liquidity is exchanged between market participants in a fully collateralised manner. This offers market parties the opportunity to comply with a margin requirement driven by legislation and regulations, such as the European Market Infrastructure Regulation (EMIR). Or they can meet a delivery obligation towards the counterparty or the Collateral Support Annex (CSA).
What questions do you need to ask yourself if you want to lend stock?
- For example, can you continue to exercise the voting rights on the lent shares yourself? The securities lending programme can be designed according to your wishes, including the possibility of using the voting right yourself.
Is the programme fully collated? The value of the collateral is always higher than the value of the securities lent out. You will receive collateral daily on the collateral account with which you are fully collated.
- What consequences does lending securities have on my ESG policy? Your policy will also be applied to the collateral. You will not receive securities as collateral that do not fit in with your ESG policy.
Based on your answers to these questions, you can decide whether you want to lend out your securities and under what conditions you want to do so.
How can we help?
We can fully support you in lending your investment portfolio. Within a defined risk framework and under clear collateral conditions, you can thus generate an optimum return. Our global network enables us to lend your liquidity at low risk, without accepting cash or financial institutions as collateral. We also periodically check the creditworthiness of the counterparties or, if desirable, on an ad hoc basis.
We offer you a transparent and fully customised programme that complies with your ESG policy and principles. We also offer the possibility of providing customised reports on your securities lending activities. Our securities lending programme is an ISAE 3402 process and is therefore subject to both internal and external audit and we are a member of the International Securities Lending Association (ISLA).
We can help you set up a securities lending programme free of charge. We can create a low risk, safe, flexible and customised programme that enables you to generate extra returns or realise cost savings on securities in your portfolio that are held for a long period of time. If you want to learn more, please contact your relationship manager.