SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

MAIN PLAYERS AND ARRANGEMENTS

MAIN PLAYERS AND ARRANGEMENTS

2

This second section describes the participants in securities lending and repo markets, their role and their motivations. It also examines the main existing arrangements.

2.1

Main players and arrangement in securities lending

If in theory lending can take place directly between beneficial owners and borrowers, in practice a number of layers of intermediaries are often involved, as displayed in figure 20. The importance of intermediaries in the market partly reflects the fact that securities lend- ing is not a core activity for many of the beneficial owners and underlying borrowers.

Figure 20: Main players involved in securities lending transactions

INTERMEDIARIES

LENDERS (Beneficial owners)

BORROWERS

2.1

- Bridge

A - Agent intermediaries > Custodian banks > Third-party agents B- Principal intermediaries > Custodian banks > Investment banks > Broker-dealers > Prime brokers > Specialist intermediaries

> Asset managers > Mutual funds/Unit trusts > funds > Insurance companies > Endowments > etc.

> Broker-dealers > Market makers > Hedge funds > Investment banks > Prime brokers > etc.

Copyright CACEIS, 2010

2.1.1

Lenders (Beneficial owners)

Lenders, also called beneficial owners, are primarily institutional investors owning on a long-term basis securities portfolios of sufficient size. They are typically asset managers, mutual funds/unit trusts, pension funds, insurance companies, endowments, etc. The main motivation of lenders is to get additional revenue obtained at relatively low risks on assets that would otherwise be dormant in the securities accounts. These earnings can enhance the portfolio performance and offset custody fees if the securities lending program is managed by a custodian bank as agent lender or principal. It should be noted that a cautious approach of lenders to counterpart selection and restric- tive collateral guidelines will limit lending volumes. Furthermore, the securities portfolios of lenders can be more or less attractive for interme- diaries and borrowers, depending on the presence of securities in high demand (known as specials or “hot” securities) or not.

Securities Lending & Repo markets | page 31