New Opportunities in Securities Lending
IN PRINT ARCHIVE CIR Fall 2008
in Securities Lending
By Don D’Eramo, senior managing director, securities finance division, State Street Canada
The recent turmoil in the global financial markets has accelerated the transformation of the securities finance industry in Canada. Once a quiet, back-office function that generated modest returns and little attention, securities lending has since become a highly complex undertaking—albeit one still capable of yielding significant returns when properly managed for risk. As such, success in today’s market will be borne in part out of beneficial owners’ ability to recognize and understand the risks inherent in securities lending.
Going forward, well-informed institutional investors with securities to lend must continue to reassess their risk/reward parameters. This will be a crucial first step in deciding how to participate in the evolving marketplace and, importantly, what types of collateral are acceptable to secure their lending transactions.
non-cash assets versus cash
Cash is another viable collateral type that is an important component of Canadian securities lending transactions. In the months leading up to the current market predicament, cash-collateralized loans provided beneficial owners with revenues substantially higher than loans with non-cash collateral, due in part to the favourable interest rate environment, widening credit spreads, and many borrowers’ penchant for putting up cash instead of other securities. Those beneficial owners who were willing to meet these preferences experienced greater utilization of their lending programs and higher revenue per transaction because of the resulting wider investment spreads.
Following the market events of this past summer, cash continues to be important, although risk management is a primary focus as beneficial owners have become more diligent when accepting cash as collateral. While there are risks associated with cash-collateralized loans, it remains a good option for beneficial owners as long as they are aware of the risks and their own unique tolerances and are vigilant in their risk management practices.
risk management and flexibility