Finadium report: 20% of US institutions have left securities lending programmes; some considering asset under management fees

Just 20.2% of US institutions have left the securities lending market since 2008, a “much lower figure than has been reported in the popular press”, according to a new report from financial consultancy firm Finadium.

The study, which collated data from 92 public pension plans and 25 institutional investors with combined assets of more than USD2.75 trillion, also found that some funds are considering using asset under management fees instead of revenue splits. The major force driving this was an attempt for “rebalancing incentives for participants in a lending program”, the report said.

While most institutions suffered losses in 2009, some saw a return to profit and only a quarter predicted that their lending revenues would fall in the next two years, hinting at a more optimistic market. Indeed, a significant majority felt that securities lending revenue is “very or somewhat important” to their fund, while an even higher proportion felt that securities lending has become an “investment function”, rather than a back office operation.

The report is likely to hearten industry practitioners. Securities lending has been widely criticised in the mainstream press, often being spoken of interchangeably with short selling.

In November, the US Securities and Exchange Commission conducted a roundtable discussion on the industry. Lending also came under scrutiny in the UK last week, with negative comments on the subject by UK parliamentarian Frank Field and new guidance issued by the Pensions Regulator for funds using securities lending.

Finadium also found an increase in funds intending to bundle their custody and securities lending operations. Collateral management however was seen as something that could be carved out to a third party or potentially taken in-house.