What Agent Lenders and Beneficial Owners Should Look for When Analyzing Securities Lending Performance

What Agent Lenders and Beneficial Owners Should Look for When Analyzing Securities Lending Performance

By David Poulton, Product Specialist, EquiLend Data & Analytics Solutions 

July 21, 2023

Standards and accuracy are important factors in any data offering, but especially when using this data to measure performance and understand revenue relative to peers. EquiLend Data & Analytics has been setting standards in performance measurement in the securities lending market since inception, and we continue to raise those standards and provide actionable insights for our clients in conjunction with our vast global client network and industry bodies, such as ISLA’s Performance Measurement Working Group.  

When measuring performance, beneficial owners and agent lenders should be asking themselves: 

  • Which assets in their portfolio are generating the highest (or lowest) return and why? 
  • What is driving that return: Collateral? Term? Intrinsic value? Cash reinvestment? 
  • How are those returns attributed across different asset types, markets and sectors? 
  • Are there dormant assets in their inventory that could be lent out profitably? 
  • Are there other assets generating significant returns for similar funds to consider? 

These are just a few insights that can be derived from the DataLend Client Performance Reporting (CPR) and DataLend Portfolio tools, which have been providing that level of transparency to help agents and beneficial owners measure performance for many years.  

Given the complexities of the market and the unique nature of each beneficial owner’s program, some common questions emerge. For example, beneficial owners may ask: 

“How can I get a true like-for-like analysis when comparing my program to the broader industry, and how can I ensure that my agents are reporting their performance in a consistent manner?”  

The answer starts with data quality and a standardized peer group. A lender or a beneficial owner will know the types of entities that are included in their chosen peer group at any time. All peer groups are weighted at a security level to the portfolio being reviewed and are also matched at dividend rate; users are then able to select which benchmarking criteria are most important to them, such as fiscal location, legal structure, collateral type or all of them. 

An agent lender might ask: “My client’s market share far exceeds my peers; how do you cater for this scenario?”

How to handle outsized positions:

Over time, as more beneficial owner funds have been included in the securities lending market, scenarios arise where a security is held by a small number of peers, resulting in a benchmark where a single beneficial owner can hold a majority of the lendable market share. These instances are more frequent for lenders that have unique portfolios or more esoteric holdings. In these instances, the standard performance measurement approach of simply weighing a client’s lendable based upon the industry’s utilization could result in peer group results that exceed the true demand for the security. The ability to recognize these scenarios and apply new logic is a key factor in performance measurement to ensure results are fair and accurate based on true market conditions.  

EquiLend Data & Analytics’ performance measurement solutions are underpinned by robust algorithms to solve these issues and continue to monitor changes to securities lending portfolios. 

Another common question is: “My beneficial owner imposes a minimum fee or hurdle rate; can you help to provide accurate performance metrics that take this into consideration?” 

How to measure performance when there are hurdle rates:

For many beneficial owners, attribution and relative performance measurement are sufficient and should be the minimum standards in terms of good practice. For others with more stringent assessment requirements, measuring performance is more complex. An example of this additional level of complexity is where a beneficial owner specifies that a minimum fee level must be achieved before lending. Working closely with multiple agent lenders, the Data & Analytics team has developed a bespoke benchmarking offering that allows minimum fees to be defined at a client or market level. This logic maintains the key concept of relative performance measurement by restricting the peer group to only other institutions lending the same securities with the same withholding tax regimes lending above the hurdle rate. 

The EquiLend Data & Analytics team is committed to providing transparency to help agents and beneficial owners identify revenue attribution by offering unparalleled insight into their securities lending programs. With the benefit of standardized performance measurement, flexible DataLend-controlled peer groups and unique and exclusive data, it is possible to optimize your lending program and maximize revenue by making the most informed decisions with our DataLend CPR and Portfolio solutions. 

For more details, please visit our website (https://datalend.com/services/datalend-cpr/) or reach out to your DataLend Product Specialists at: [email protected].

About DataLend

DataLend, the market data service within EquiLend’s Data & Analytics Solutions group, tracks daily market movements across more than 62,000 unique securities in the $2.5 trillion securities finance market. www.datalend.com

About EquiLend

EquiLend is a global financial technology firm offering Trading, Post-Trade, Data & Analytics, RegTech and Platform Solutions for the securities finance industry. EquiLend has offices in North America, EMEA and Asia-Pacific and is regulated in jurisdictions around the globe.  www.equilend.com