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According to BNY Mellon interviews and survey, securities lending has regained a degree of momentum as a part of front-office investment activity, with the most sophisticated investors making it a core component of the total portfolio approach.

Among institutions already engaged in securities lending, some plan to liberalize lending guidelines and review existing lending agreements. These shifts counter the retreat from securities lending programs following the 2008 financial crisis, when a lack of transparency, concerns about short selling and perceived links to market volatility steered many public asset owners away.

Securities lending is moving beyond these concerns. Growing regulatory support, front-office control and governance, flexible platforms and technology, and alignment to broader principles and mandates may create a supportive backdrop and foster a more positive attitude.

Recent initiatives focusing on transparency and reporting seem to have reinforced institutional confidence. For example, the European Unions Securities Financing Transactions Regulation (SFTR) introduced granular transparency for securities lending transactions.4 In November 2021, the U.S. Securities and Exchange Commission (SEC) proposed similar reporting rules for securities lending participants.5 Regulators are also considering mandatory clearing to strengthen securities lending.6 Central clearing could increase utilization and revenue for public asset owners while potentially reducing risk.

Based on interviews, institutions increasingly see securities lending as part of front-office investment activity rather than merely an offset for administration and custody costs. One official in the survey who relies heavily on external managers explained, The most sophisticated investors see securities lending as a component of a total portfolio approach alongside their investments.

Interviews revealed that public asset owners have more flexibility in securities lending than previously. For example, they can tailor lending for a given spread or focus only on a limited set of high-value securities. The industry is also increasing its flexibility by extending the range of acceptable collateral. Ultimately, however, its the overall features of a collateral set, such as concentration limits, minimum capital requirements and minimum share price levels, that are recognized as more important than the inclusion or exclusion of a specific security. Additionally, fintechs are also offering so-called fully paid securities lending, allowing intermediary banks or brokers to act as a 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 instance.

Interviews showed that sustainability considerations can raise concerns about conflicts with an institutions mandate and objectives. Further, public asset owners in the Middle East and parts of Asia want to ensure that securities lending counterparties are Shariah-compliant. Malaysia became the first market to adopt a Shariah-compliant securities lending framework in 2017.7 Still, others interviewedstruggle with the ethical implications of perceived downward pressures on markets. As a result, securities lending platforms are evolving to accommodate a broader set of principles, affording public asset owners better tools to understand the implications of their securities lending programs. Emerging solutions are also allowing clients to see the ESG implications of their collateral and to control prohibited short-selling.

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Meeting the ESG Imperative Holistically - Institutional Investor