Securities Lending: Client or Counterparty - which are you?

Updated: Oct 29, 2019

A strange phenomenon in our industry is that it is at times unclear as to who is the client of whom. When representing an institutional investor, you are usually seen as the client where banks/brokers try to sell their products and services to you. The institutions are characterised as the buy-side and banks/brokers the sell-side. The real world isn’t as black and white as this but in general, this is how it usually works. One of the most shocking experiences I had when moving from the buy- to the sell-side was that the asset management company where I had spent many years and thought of highly, was reduced to a revenue wallet…

In Securities Lending, principals are both client and counterparty

However, Securities Finance doesn’t quite work that way. The borrowers produce the demand on which lenders can make an additional return on their assets. And (according to information published on the ISLA website) there are globally EUR 19,6 trillion in assets available for lending at the moment of writing, while about 11% of that (EUR 2,2 trillion) is actually borrowed.

So, who is the client of whom? If we only apply the rule of supply and demand, clearly the borrower is the client. It can direct its demand for securities to a vast array of lenders and it obviously goes where terms are most favourable. Borrowers, often being banks, have enormous amounts of assets on their balance sheets, which they aim to use as much as they can as collateral against the borrows they source from lenders. Those lenders that can show flexibility in the collateral they accept against the securities they lend, obviously will attract more loans. Since the crisis of 2008 and the inception of rules like LCR and NSFR, the requirement for collateral flexibility has only increased. The famous collateral upgrade trade has never been bigger. And taking into account that for borrowers, internal funding is usually not cheap, the more self-funding its financing business is (so basically the more of their own balance sheet assets they are able to use directly against their borrow requirements) the lower their collateral cost, and therefore the more profitable their business becomes.

For borrowers, this is exactly what securities finance is: a business at the core of their operations. Lenders should always approach it in a similar fashion if they wish to attract a larger slice of the pie of securities on loan. Lenders, the actual beneficial owners, are obviously free to set their own terms of business and this self-determination is the most important control feature for lenders. They can for example decide only to lend large-cap equities of mature markets against German government bonds, but the chance of lending much volume will be minimal. Obviously if a lender gives free range to the borrower on what will be provided as collateral, it might end up with a collateral pool which could be considered toxic. Active daily involvement in your lending programme is therefore crucial. I once had the privilege when attending a conference to sit next to a very nice lady working for a pension fund, who, outside of her day-to-day work, spent one afternoon per week overseeing the fund’s lending programme. The fund had an AuM size of about USD 100 billion! A classic example of clearly not seeing it as the business which you are actually a part of!

I think it is safe to conclude that in securities finance, we are all counterparties. We have credit-risk exposure to each other which we reduce to a minimum through establishing sound governance practices, careful counterparty selection and by exchanging collateral. As a lender it is therefore of utmost importance that there is continuous access to, and monitoring by, at least a credit-risk function, even when your lending programme is outsourced to an agent.

At Pierpoint Financial Consulting, we invite you to discuss your views and activities in today’s securities finance market and how you might be able to attract more of the proverbial pie. To make this invitation a more compelling decision on your part, Pierpoint gives you the option of a two-day free “health check”. For more details on this offer, please check our website or contact us via

Raymond Blokland

Benelux Consulting Lead


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