Securities Lending can represent a very attractive source of additional revenue for investors. Although the process is simple, reward always requires the introduction of additional risk.
Some investors perceive Securities Lending as risk-free, but there is significant risk associated with any financial product. This exposure can be mitigated by establishing control monitoring and by ensuring understanding of the product in your organization.
At face the process is simple: a temporary transfer (loan) of a security is exchanged for cash collateral which is reinvested to create additional income for the lender. Lending need not impact independent investment strategy, and if properly managed provides an opportunity to create an additional flow of income. Proper risk management tools should be utilized to ensure appropriate oversight.
What are the risks? The two greatest are risk are: 1) counterparty (borrower) default, and 2) on the reinvestment side, credit, interest rate and liquidity risk. Fortunately, industry practice is for collateralization in excess of market value by a set margin. Proper risk management mandates daily monitoring of this margin and establishing tolerances of counterparty and investment exposure. Failure to adhere to these principals is perilous and has resulted in loss, most notably in the 2007-2009 financial crisis. However, a properly designed program can significantly mitigate these risks.
Pohl Consulting and Training can provide guidance in the development of new, or the strengthening of existing, securities lending programs, through partnership, infrastructure assessment, risk management review and training. This review will include an appraisal of your organizations current tools, processes and systems, in relation to securities lending principals such as:
Tracking of counterparty exposure levels
Mark to Market monitoring
Collateral investment review
Tracking of dividends and coupons for securities on-loan
If you and your clients see opportunity in Securities Lending, Pohl Consulting and Training can help you:
- Assess if Securities Lending is right for you and your clients
- Analyze profit opportunities
- Assist in the selection of third party providers
- Design organizational structures
- Review quality of service applications
- Create policies and procedures to ensure appropriate oversight
- Provide guidance and development of marketing materials
- Ensure staff is trained and client facing personnel confident in clearly explaining the product