Sec Lending Viewed as Asset Class

Securities lending can be lucrative for institutional investors provided they understand the risk, Mark Payson, senior vice president at Brown Brothers Harriman, said at Thursday's Global Markets Summit in Manhattan.

“A subset of the securities lending population saw phenomenal performance in 2008 because they were able to turn data into information,” he said. “Transparency needs to be used as a risk mitigation mechanism for beneficial owners.”

Asset managers are looking to their agents and custodians to provide the information they need to make informed sec lending decision. “Large fund companies have always looked at sec lending as an asset class and investment management product, and are looking for ways to leverage that information.”

Securities lenders will stage a “significant movement away from the one provider to multiproviders during the second half of 2010,” Payson said.

Standard & Poor's this year launched the S&P Securities Lending Index Series in order to measure average cost of borrowing; the index tracks the average securities lending rate for the constituents of the S&P 500, S&P MidCap 400, S&P SmallCap 600, and the underlying sector sub-indices for all three leading U.S. equity benchmarks.

“The Index bring transparency to what we believe is an otherwise opaque market,” said Glenn Doody, vice president at Standard & Poor's. “The index serves as a benchmark, a tool for investment analytics, and an objective settlement value for hedging transactions.”

The rebate rate is often based on a spread to a benchmark funding rate like Libor or Federal Funds. Since movement in the indices can be largely influenced by the movement of the funding rate, S&P Indices has also created a “Spread” version of each index which reflects the spread between the funding rate and the average securities lending rate for the reference equity index.

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Posted on Dec. 3, 2009