SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

MAIN PLAYERS AND ARRANGEMENTS

The lender agent model brings various benefits to the beneficial owners who use it, as displayed in figure 24: > The scale of the lending business of the agent gives them advantages compared with owners lending securities directly themselves; > The efficiency of the agent’s systems allows them to make loans that would be too short term, small or poorly compensated to be worthwhile for the owner to do so; > Agents are more likely to know or have access to brokers who know of a borrower for any particular security; > Agents’ specialised knowledge of the market means that they are more likely to know the true value of any particular security; > If the agents are a custodian, then they may have late access to the settlement system that enable them to provide last-resort loans late in the day at emergency rates 11 ; > Agents can also offer lenders who do not wish to reveal their identity (e.g. sovereign insti- tutions, central banks) a measure of anonymity.

Figure 24: Benefits for beneficial owners when employing an agent lender

2.1

Lending business scale

Efficiency of systems

Relationship with brokers, access to a large pool of borrowers

Specialised market knowledge

Late access to settlement systems (if agent is a custodian)

Anonymity for lenders who do not wish to reveal their identity (e.g. supranationals)

Copyright CACEIS, 2010

• Custodian banks The history of securities lending is inextricably linked with custodian banks. As custodian banks are able to mobilise large pools of securities available for lending, thanks to their large number of institutional clients, most of them have integrated securities lending to their core businesses with flexible agent and/or principal lending programs providing an access point to the market for their clients, as well as other services such as foreign exchange. Owners and agents split the revenues, which are based on many factors, such as the service level and provision. Secu- rities lending is often part of a much bigger relationship and the split negotiation can become part of bundled approach to the pricing of a wide range of services.

11 Source: Global Custodian, “Collateral: Securities Lending, Repo, OTC Derivatives and the Future of Finance”, 2007

Securities Lending & Repo markets | page 35