Sec lending volume down, but fees up in ‘09

In the firm's securities lending Yearbook released today, officials found the decrease in volume was due to a drop in general collateral lending, said director Ed Oliver.

"General collateral lending is the practice where borrowers take large baskets of common stocks in return for an allocation of ‘hard to borrow' securities," said Oliver. "Fees are higher for hard-to-borrow securities so therefore the average becomes higher."

Driving the shift from volume to value is the pressure on borrowers to increase returns on their balance sheets.

"(Borrowers) need to be more choosy on their loans. There is significant balance sheet impact in providing collateral that is worth more than the value of the security borrowed. It is essentially an unsecured loan to the lender," said Oliver.

However, earnings from cash-reinvestment programs generally decreased as investors put their cash collateral in short-term cash investments instead of longer-term instruments used to bring in higher returns, he added.

For pension funds, the shifts in securities lending trends over the past year could lead to more volatile earnings.

"(Pension funds) will obtain revenues for securities in demand - such as those subject to M&A activity - but not as much general collateral revenues; depending on the portfolio there will be good and bad months," said Oliver.

He added: "However lower volumes and higher fees, with the same overall revenues, is a better result for lenders as lower volume results in lower transaction risk."

Oliver predicts this is a permanent change in securities lending transactions.