Demystifying Securities Lending
In spite of continuing education, many funds and beneficial owners are still weary and remain to be convinced about securities lending Credit crisis had unparalleled impact on global economies and financial stability Short selling & securities lending blamed as cause of crashing markets Securities lending remains important product in capital market
South African securities lending market dates back to the mid 1990 s Until credit crisis, the industry has been experiencing exponential growth due to : Technology The Derivatives market Introduction of market standard documentation Increasing numbers of beneficial owners deciding to lend their assets The crease in arbitrage and proprietary trading strategies 2007 South Africa - R160 billion (Global estimate USD 5.5 trillion) Currently South Africa - R100 billion (Global estimates USD 2 trillion)
180,000,000,000 160,000,000,000 140,000,000,000 120,000,000,000 100,000,000,000 80,000,000,000 60,000,000,000 40,000,000,000 20,000,000,000 - SASLA Total Book SASLA Total Book 26/01/2007 26/03/2007 26/05/2007 26/07/2007 26/09/2007 26/11/2007 26/01/2008 26/03/2008 26/05/2008 26/07/2008 26/09/2008 26/11/2008 26/01/2009 26/03/2009 26/05/2009 26/07/2009 26/09/2009 26/11/2009 26/01/2010 26/03/2010 26/05/2010 26/07/2010 26/09/2010 26/11/2010
What is securities lending? Securities temporarily transferred from one party to another for a fee Borrowing party provide securities or cash as collateral. Term of loan may be open-ended or for a specific duration. What does this mean for the market and investors? Long-established practice, Recognised by central banks, regulators, exchanges and participants, Contribution to functioning of global capital and money markets Provides liquidity which drives down trading costs and promotes price discovery Facilitates the reduction of settlement fails Enables the financing of inventory positions Generates incremental income for its participants Increase in efficiency benefit market as a whole
Agreed lending rate Agreed borrowing rate GMSLA GMSLA Securities Securities Lender Custodian Borrower Undertaking Collateral
Borrowers Large financial institutions investment banks, global banks, market makers and broker-dealers Lenders Large scale investors -pension funds, insurance companies, collective investment schemes and sovereign wealth funds. Agency vs Principal
Third party specialists in securities lending services. Beneficial owners outsource their lending programmes to agents to: Reduce operational workload Gain from agents efficiencies and economies of scale and established relationships with securities borrowers. Benefit and appeal of agent lenders iro : Smaller lender Broad pools of demand Diversifying counterparty risk Agent lenders will typically: evaluate potential borrowers according to pre-agreed credit guidelines; negotiate rates and monitor loans; provide daily mark-to-market evaluations to ensure adequate collateral coverage; collect fees from borrowers; monitor client accounts for sale activities; provide clients with reporting on outstanding loans and revenue earnings on portfolios.
Securities lending is an inherently conservative product from a risk perspective. However, there are real risks which must be understood and closely managed. These risks, and their management, include the following and should form part of a beneficial owner s securities lending policies and procedures: Borrower risk Collateral risk Cash collateral risk Intraday settlement risk Operational risk Legal risk Other risks
Securities lending as an activity is not formally regulated Operate under guidelines laid down by SASLA who works closely with ISLA Securities Transfer Tax Act, 2007 STT applies if a trade exceeds 365 days STT applies if a borrower borrows stock and sit long these shares for a period longer than 10 days Self assessed tax Securities Services Act, 2004 Section 43 statutory flagging of uncertificated securities as collateral Long and Short Term Insurance Act Regulation 28 of the Pension and Provident Fund Act
Securities lending revenue can be an important differentiator in a fund s performance. Additional income can be used to defray custody charges or other expenses of the fund. Returns from securities lending programmes increase in proportion to: firstly, the interaction of demand and supply, secondly the amount of risk a lender is willing to assume.
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