By Samuel Ganeles
Evolving technology, today’s financial climate and the changing needs of investors have led to securities lending – once the reserve of large financial institutions – becoming increasingly recognized as a new potential revenue engine for all wealth managers. When it comes to securities lending programs, there are two strategic approaches wealth managers can take: volume lending and value lending. In this post we look at both.
What is volume lending?
Volume lending, also known as general collateral (GC) lending, is focused on lending readily available1, highly liquid securities at a very low fee. The fee earned by the lender directly correlates with the level of risk incurred with respect to collateral type and the manner in which cash collateral is invested. GC makes up most of the volume of the loaned securities within the securities lending market. For the most part, main index securities, including those which make up the FTSE 100 and the S&P 500, will be GC.
With this approach, the goal is to increase the volume of securities lending activity and enhance revenue by taking on greater risk. This can result in the underlying client lending out a higher volume of securities that demand lower fees, which, depending on portfolio composition, may not generate as much profit per loan as securities that demand higher fees.
Low fee, high volume lending is often accompanied by reaching for yield by lending a high-quality security and accepting a security of lesser quality as collateral, such as lower grade bonds or equities. Volume lending also requires a larger percentage of the portfolio to be on loan in order to generate meaningful returns.
What is value lending?
Value lending, in contrast, refers to the practice of lending securities that command a higher fee in the securities lending market – and can be a lucrative strategy for wealth managers and their underlying clients. Revenue correlates with the intrinsic value of such securities, I.e., the value generated by the desirability of such securities in the borrower market.
This approach focuses on higher, risk-adjusted rates of return by selectively lending securities that demand higher fees – these are called ‘specials’ and, when it comes to the most sought-after securities, ‘deep specials.’ Revenue associated with value lending is not driven by taking on increased risk and more conservative collateral strategies are generally adopted by such lenders.
As an example, the infographic below indicates the value on loan required of a basket of GC stocks versus one deep special stock in order to generate the same revenue over a 30-day period.
Where SLaaS fits in
Securities Lending as a Service – or SLaaS as we call it – was built with the underlying investor in mind and, as a result, and uniquely in the market, combines full control and transparency with minimal up-front costs.
SLaaS is an end-to-end digital securities lending service that empowers all wealth managers and online brokers to offer a more flexible and strategic approach when it comes to lending out their clients’ stocks, bonds, and ETFs. By enabling them to be more selective in their lending decisions they can ensure that they are only lending out securities that they believe will generate the greatest returns.
Whatever your approach, in times of volatility, where the value of securities can fluctuate rapidly, unlocking new, stable revenue streams from assets you own presents a huge opportunity.
Samuel Ganeles is U.S. Sales Lead at Sharegain
1See discussion of volume vs value lending in the SEC Proposed Rule 10c-1 : https://www.sec.gov/rules/proposed/2021/34-93613.pdf at p. 18.
Lending your securities may place your capital at risk, and you should obtain independent advice before engaging. Securities lending involves risks and we have not and will not assess whether our service is appropriate for you.
The lending returns referred to in the diagram are based upon the lending performance of a single stock relative to a basket of general collateral over a 31 day period in January 2023 and assumes 100% utilization. This should not be construed as indicative of the performance of all stocks during that period nor should it be indicative of future performance. Lending rates rise and fall based upon inherent demand and availability. Sharegain fees and settlement costs will reduce lending returns.
Source of securities financing data: IHS Markit Ltd. (“Markit”), January 2023. Neither Sharegain nor Markit, its Affiliates nor any third party data provider makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the securities financing data contained herein (“Markit Data”) nor as to the results to be obtained by recipients of the Markit Data. Neither Markit, its Affiliates nor any data provider shall in any way be liable to any recipient of the Markit Data for any inaccuracies, errors, or omissions in the Markit Data, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom. Without limiting the foregoing, Sharegain, Markit, its Affiliates, or any third-party data provider shall have no liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the Markit Data herein.
