Special Report: Owners of public assets are changing

According to BNY Mellon interviews and research, securities lending has regained some momentum as part of front-office investment activity, with more sophisticated investors making it a central part of the approach of the total portfolio.

Of the institutions already engaged in securities lending, some plan to liberalize lending guidelines and review existing lending agreements. These changes thwart the withdrawal of securities lending programs after the 2008 financial crisis, when a lack of transparency, concerns about short selling and perceived links to market volatility turned many owners of public assets away. .

Securities lending goes beyond these concerns. Growing regulatory support, front-office oversight and governance, flexible platforms and technology, and alignment with broader principles and mandates can create a supportive environment and foster a more positive attitude.

Growing regulatory support

Recent initiatives focusing on transparency and reporting appear to have strengthened institutional trust. For example, the European Union’s Securities Financing Transactions Regulation (SFTR) introduced granular transparency for securities lending transactions.4 In November 2021, the United States Securities and Exchange Commission (SEC) proposed similar reporting rules for securities lending participants.5 Regulators are also considering mandatory clearing to bolster securities lending.6 Central clearing could increase the use and revenues of owners of public assets while potentially reducing risk.

Front office control and governance

According to the interviews, institutions are increasingly viewing securities lending as part of front-office investment activity rather than simply offsetting administration and custody costs. A survey leader who relies heavily on external managers explained, “The most sophisticated investors view securities lending as a component of a total portfolio approach alongside their investments.”

Flexible platforms and technologies

The interviews revealed that holders of public assets have more flexibility than before when it comes to securities lending. For example, they can tailor loans to a given spread or focus only on a limited set of high-value securities. The industry is also increasing its flexibility by expanding the range of acceptable collateral. Ultimately, however, it is the general features of a set of safeguards, such as concentration limits, minimum capital requirements and minimum share price levels, that are recognized as more important than the inclusion or the exclusion of a specific title. In addition, fintechs also offer so-called “fully paid” securities lending, allowing intermediary banks or brokers to act as counterparty for higher value/spread trades. Finally, securities lending platforms can increasingly integrate with institutions’ operations for better visibility alongside other portfolio data, using APIs, for example.

Alignment with broader principles and mandates

Interviews showed that sustainability considerations can raise concerns about conflicts with an institution’s mandate and goals. In addition, holders of public assets in the Middle East and parts of Asia want to ensure that securities lending counterparties comply with Sharia law. Malaysia became the first market to adopt a Sharia-compliant securities lending framework in 2017.seven Yet other interviewees grapple with the ethical implications of perceived downward pressures in the markets. As a result, securities lending platforms are evolving to accommodate a broader set of principles, providing holders of public assets with better tools to understand the implications of their securities lending programs. Emerging solutions also allow clients to see the ESG implications of their collateral and control prohibited short selling.

Shirlene J. Manley