In collaboration with Global Pensions, Data Explorers Consulting brings you the latest in global trends and analysis on securities lending. Pension funds should prepare for a weaker revenue stream, as Ed Oliver writes
Securities lending revenues have been under pressure in recent months causing a headache for pension funds keen to see this strong source of additional returns continue.
Three quarters of the attendees of Data Explorers’ Securities Financing Forum in March anticipated that 2010 securities lending revenues would be flat or down compared to 2009. Everyone is looking closely at the earnings through the important European dividend season where demand for equities is usually at its strongest.
The table shows the situation at this early stage in the dividend season looking at returns since the beginning of March and it doesn’t make happy reading.
In the same period in 2009, the return from securities lending (not including potential additional returns from investing cash collateral) increased from three basis points (bps) to nine bps; in 2010 we have only seen a move from three bps to 6.25 bps. See chart 1.
The difference is pronounced when examining equity lending exclusively with the 2009 returns increasing from six bps to 18 bps during the period; in 2010 we have seen an increase from four bps to 10 bps. See chart 2.
So at this early stage of the dividend season it appears that revenues are tracking well below 2009. Is there anything pension funds can do to improve their slice of the pie?
At a Data Explorers webinar on April 20 entitled Show me the Money, the panellists were asked for their views on how pension funds can improve their securities lending returns. Flexibility is definitely key, particularly around collateral acceptance. However, as one panellist pointed out – don’t budget for securities lending revenue but accept that all revenue earned is a bonus and keep within your chosen risk parameters.
As pension funds look at collateral flexibility, equity collateral is one of the options. Data Explorers will be asking US regulators if they propose to lift restrictions on US institutions providing and accepting equity collateral at the New York Securities Financing Forum on May, 26.
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