Survey Shows Securities Lending Revenue Likely to Decline

(January 20, 2011) — A new report from research and consulting firm Finadium shows that 60% of pension plan executives believe securities lending revenue will decline within the next couple of years. Only 15% of of respondents believe revenue will grow, while one-fourth believe it will stay unchanged.

The 98 corporate and pension plans surveyed said that during 2010, securities lending revenue fell 30%, compared to an increase of 8% in 2008. The decline, the respondents said, has been fueled largely by falling hedge fund demand, along with other factors. “Declines in hedge fund borrowing have reduced the size of the securities lending market by over 40% from its 2008 high; this in turn has meant a sharp reduction in securities lending revenues for plan sponsors,” according to the report, titled “US Plan Sponsors on Securities Lending, Collateral Management and Custody in 2011: A Finadium Survey.”

“Another big point was the perception that institutional investors have on securities lending as an investment product, with one group hoping for more returns and another group looking not to participate as a result of losses in 2008 and 2009,” Finadium’s Josh Galper told aiCIO. “The biggest impact I hope this report will have on pensions will be to stress the importance of more oversight — some are already doing this but there is another group that sees securities lending more as a byproduct,” he said, adding that a solid understanding of risks and opportunities means that funds will have a better opportunity to protect themselves.

Finadium’s report additionally highlighted that more important than revenues, communication and client relationship management are now the most important criteria for what makes a good securities lending agent, with liquidity in cash reinvestment markets becoming a greater concern amid new regulations that limit the availability of certain types of assets.

The study is Finadium’s fourth annual survey of plan sponsors based on interviews and annual reports of US plan sponsors with over $2.23 trillion in assets.

Separately, a Senate subcommittee began an investigation into securities lending providers last month following severe portfolio losses and strained relationships between pension funds and their securities lending providers. During the financial crisis and since, many investors – including some of America’s largest pension plans – had seen their ability to gain capital from securities lending programs severely curtailed. ” This is not an ongoing issue except in a few small circumstances, and is being actively resolved,” Galper told aiCIO. Losses have led to numerous instances of pension funds suing the firms hired to lend securities on their behalf. While such issues have been well-covered in the niche financial press, two recent articles in prominent national newspapers – The New York Times and the Wall Street Journal – have prompted a Senate subcommittee to launch and investigation, according to Global Custodian, an aiCIO sister publication.