By lending securities, pension funds receive extra income, while the securities can be called back at any time. You should consider five points that are important in decision-making on whether to participate in securities lending.
30 Mar 2016
Securities lending has traditionally acted as a lubricant for the financial markets. This involves a worldwide market of $15 trillion and more than 3 million intra-day transactions per day; which makes securities lending an excellent aid to generating liquidity for collateral requirements under EMIR.
For institutional investors, securities lending is a good instrument, with a low risk profile, for generating extra returns on securities that will remain in a portfolio for a longer period. By lending these to carefully selected parties, pension funds receive extra income, while the securities can be called at any time.
However, securities lending also helps market parties with their risk management. After all, lending securities creates greater liquidity, since the fees are paid in cash. Furthermore, liquidity is exchanged between market parties in a fully collateralised manner. This offers market parties the opportunity to comply with regulation-driven margin obligations, such as those under EMIR, or with a delivery obligation to a counter-party or CSA.
Liquidity and risk mitigation
This also expresses the value of liquidity and consequently, the risk mitigating effect too. On the one hand, the traditional return on lending securities is generated in a responsible manner and at the same time, investment strategies can remain unchanged despite, for instance, laws and regulations. This makes access to the securities lending markets of major importance for institutional investors.
Before you decide to make use of this possibility, it would be wise to ask yourself a number of
- What does liquidity mean for your organisation?
- Which sources of liquidity are available to you and which requirements must these meet?
- Is it attractive to you to generate extra returns with a limited risk, taking account of conditions that are important to you?
In answering these questions, you can take the following into consideration. Securities lending can be designed entirely in accordance with your specific requirements and needs. For example, there is the possibility of retaining or exercising the voting rights attached to the securities lent. The programme also takes account of your ESG policy and is consequently fully ‘ESG proof’. Finally, securities lending offers a healthy risk/return ratio in combination with a conservative collateral policy as a risk-mitigating instrument.
Five points that are important in decision-making on whether to participate in securities lending
• A ‘customised’ programme (set up in accordance with the needs of your organisation)
• Possibility of continuing to exercise voting rights yourself
• ‘ESG proof’
• Fully collateralised programme
• Generating both liquidity and extra returns
Our securities lending specialists will be happy to discuss with you the possibilities for setting up a
fully customised programme.