Securities lending in 2016
The nature of agency lending is changing along with financial markets in the post-Global Financial Crisis era. Agent lenders have become more responsive to their clients, as well as to the needs of their counterparties in the face of complex regulatory requirements. Some institutions view 2016 as an uncertain time for their agency programs, while others have doubled their commitments to the business.
At BNP Paribas, we see a great future for our clients and our agency lending program, and we are paying careful attention to the exceptional markets and regulatory context to maintain a successful outcome. The search for incremental returns has led beneficial owners to entertain a variety of revenue generation strategies which fit within their risk tolerance. Specifically, demand for a customized, separately managed account tailored to a client’s risk profile continues to gain traction. The demand for a flexible program has resulted in greater participation in agency lending services, both custodian-based and third party. In 2013, 28% of large asset managers in the US and Europe engaged a third party agent; in 2015 that figure rose to 35% according to Finadium data (see Exhibit 1). By comparison, only 17% of pension funds engaged third party agents in 2015, which is up from 12% in 2013. We see this reflected in our own program as well; our non-custodial US client base has grown considerably since we launched in 2014.
Customization related to liquidity, reinvestment parameters and asset class expertise are often cited as the rationale for engaging in a third party lending strategy. This is a somewhat different model than 20 years ago and has strong commonalities with portfolio management in that clients tend to take an active approach to program management, including the setting of lending limits and asset class participation. The more in demand the asset base, the more that beneficial owners can create specialized programs that maximize the value of their portfolios.
This article originally appeared on Securities Finance Monitor.