SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

CHALLENGES & OPPORTUNITIES

As a consequence, having the right capabilities in terms of infrastructure, processes and procedures, sub-custodian network (to have a global coverage of markets) and expert re- sources (for the trading side as well as for the administrative side) is crucial. Sophisticated risk management and collateral management infrastructures are no longer a “nice to have” but really a “must have” for market participants to remain competitive and to be able to generate value in a risk-controlled environment. Both aspects are examined further in sub-sections 3.4 and 3.5. Another operational challenge for agent lenders today consists in satisfying the benefi- cial owner’s need for transparency which emerged after the Lehman collapse, fueled by increased regulatory scrutiny and changing views and expectations of beneficial owners. Indeed, after this major default event, many beneficial owners asked themselves about their lending programs. The most common questions raised were the followings: > Do we fully understand the risks of our lending program? > Do we have the tools and reporting to adequately monitor and manage those risks? > Who else in the organisation should be apprised of our securities lending program and its activities? They now want to see where returns are being generated and what risks they are taking to achieve these returns. They also want to ensure that earnings are being allocated appropri- ately and not subsidising other clients’ accounts. This new focus on transparency requires the ability of agent lenders to produce sophisti- cated reporting on the securities lending activity conducted on behalf of their clients and to give them access to this information on a daily basis or even in real-time. Even five years ago, it was unusual for any meaningful information to be available for lend- ers, and retrospective reports on positions and earnings were delivered perhaps once a month. That time is definitively gone. Today, securities lenders can see information in most asset classes on a daily basis, and some of them require information in real-time. They also have access to full details of assets on loan, the proportion of a portfolio on loan, and the risks to which they are exposed through counterparts and collateral, across all of the routes they take to market. The more sophisticated provider platforms even offer current and historical performance measurement analysis. Besides, some lenders now require reports to be disseminated more broadly in their organisation, while the oversight and management of lending was previously the sole responsibility of the Operations or Treasury group 27 . Investors’ focus on transparency

3.3.3

3.3

27 Source : JP Morgan, « Securities lending as an asset management technique », 2010

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