Securities lending is a well-established and critical part of mainstream capital markets. It enables lenders such as investment managers to generate additional sources of alpha and borrowers to support trading strategies and balance sheet management needs. As such, it is a critical and widely used tool for fund managers, treasurers and traders across the globe. On an average day in March 2018, for example, of the $20.2 trillion of assets available for lending globally, $2.6 trillion of these assets were on loan (1). Put another way, one in eight of every issued stock is being used in securities lending at any point in time.
A commoditised but creaking product
While the securities lending market is massive and mature, in many ways it has not kept pace with the modernisation that has transformed other parts of capital markets such as the advent of electronic exchanges and product standardisation. While participants rely on standardised legal terms in the form of the Global Master Securities Lending Agreement, borrowers and lenders are typically intermediated by prime brokers and agency lenders and do not benefit from the transparency and price discovery capability taken for granted in electronic markets. Furthermore, loan servicing processes continue to be seen as intensive and inefficient.
A new and improved model
Given a blank sheet of paper and the technology available today, a very different model for serving the needs of borrowers and lenders would be possible. This new and improved model would feature:
- an exchange-based model for arranging loans, ensuring all participants can see and access market rates;
- an efficient automated platform for full lifecycle loan servicing, including initiation, settlement, margin management, default and settlement;
- a robust and standardised legal and foundation, ensuring that loans terms are enforceable and that regulatory reporting is simple; and
- a transparent and consistent fee structure.
While the benefits of this approach are clear, achieving this type of generational leap forward within the confines of classic securities lending is very challenging.
Digital assets represent a clean slate
As the digital asset class begins the process of maturing with the emergence of services designed for the needs of institutional participants, there is a once-in-a-lifetime opportunity to re-imagine securities lending rather than replicate the flaws of existing practices. In establishing a next generation model of securities lending for digital assets, it is possible not only to serve these borrowers and lenders well, but to act as an example and inspiration for the world of conventional securities lending.
1 Source: Markit, 1 March 2018 to 31 March 2018.
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