SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

FISCAL AND OPERATIONAL ISSUES

Ultimately, a few lenders suspended their programs or withdrew entirely from the mar- ket. However, the majority continued to lend, with some introducing additional restric- tions and controls. After experiencing losses on collateral pools or ‘near misses’, some lenders have decided to move towards an intrinsic value lending orientation, which produces returns based upon the securities loan itself, with little incremental benefit from collateral reinvestments. These beneficial owners have questioned the risk/reward trade-off of GC lending. This is a thin spread/high volume product which is often dependent on collateral reinvestment returns. By limiting activity to those loans with adequate intrinsic value, the importance of the rein- vestment return is reduced. This view is reinforced by the current lack of attractive money market reinvestment opportunities and has manifested itself in the following two ways: Firstly through more conservative reinvestment guidelines and secondly by the implemen- tation of minimum spread parameters for certain programs 28 . This trend consisting in shifting from volume lending of low margin securities towards value lending of higher margin securities is expected to continue according to market specialists. Instead of taking credit or duration risk with collateral to generate additional return, the emphasis is now back on the primary purpose of collateral, namely to protect principal and secure the loan with the emphasis on stability and liquidity.

28 Source: Goldman Sachs, “Securities lending: new priorities”, April 2010

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