Securities lending is an additional, relatively low-risk way for investors to unlock the full potential of their portfolio. In decades of lending securities Investors and Securities owners have focused on competitive returns while balancing return, risk and cost.
If an Investor lends his securities to you, there is a Capital at Risk!
With securities lending there is a risk of loss should the borrower default before the securities are returned, and due to market movements, the value of collateral held may have fallen and/or the value of the securities on loan has risen.
The market is organised through platforms which build and enable a proprietary securities lending infrastructure so that a lending activity is executed in the Investor or Securities Owner’s best interests and with prudent risk management.
Skilful risk management
A basis for skilful risk management builds the Securities Borrowing and Lending Agreement. There is a conservative, low-risk approach and the integration of capabilities of our dedicated research, trading and risk management.
Proprietary technology
A dedicated team works on custom-built reporting, operations and trading systems to help ensure transparency and operational efficiency.
Robust assessment of borrowers
Only highly creditworthy borrowers based on conservative credit standards defined by a risk assessment team can qualify and are considered to be served in this Securities Borrowing and Lending Transaction.
Benefits of securities lending
Securities lending is a way to unlock additional value of a portfolio of an Investor or Securities Owner. The Securities Lender will collect higher returns than would otherwise be received. Investors may benefit from securities lending in the form of better performance. How? Additional income is generated through the fee that it charges for loaning securities to a borrower.
Borrower default risk
Since the process involves lending securities, there is a risk that a borrower fails to return a borrowed stock or bond.
To minimize risk to investors, it has to be determined whether firms may be approved as borrowers.
An internal risk unit performs initial Due Diligence and regular borrower reviews. New transactions are systematically prevented if a borrower reaches its limits. As an additional safeguard there can be an indemnity available to safeguard in the event of a borrower default.
From what I summarized here you can see: There is also another side of the coin. It is true, an investor aims for additional profits if he provides his own securities or if he actually buys additional securities to back up a client’s Bank Guarantee or Standby Letter of Credit, but he actually carries great risks
• if a client does not follow through with a transaction
• if a client’s receiving bank does not send the conditional payment
• if the receiving bank does not return the instrument in case the beneficiary client defaulted on loan re-payments
If companies like Blackrock engage their investor clients into Securities Borrowing and Lending transactions, BlackRock has to engage and guarantee themselves to cover such potential borrower default risks and not to lose their reputation because of “bad apple” borrowers.
This is how they describe the Borrower Default Risk
“Risks of securities lending
While every investment bears some risk, BlackRock takes a rigorous, hands-on approach and has delivered positive lending income for every fund that has participated in lending since 19813. The primary risk of securities lending is borrower default risk.
Borrower default risk
Since the process involves lending securities, there is a risk that a borrower fails to return a borrowed stock or bond. In this case, the fund company would use collateral to purchase replacement securities. To minimize risk to investors, it is important that any collateral received be of high quality and liquidity.
First, we determine whether firms may be approved as borrowers; then, we monitor borrowers over time. An internal risk unit – separate from the securities lending team – performs regular borrower reviews. New transactions are systematically prevented if a borrower reaches its limits. As an additional safeguard in the event of a borrower default, BlackRock provides an indemnity for its lending funds domiciled in Europe – if a shortfall existed between the collateral and the cost to repurchase a loaned security, BlackRock would reimburse the fund in full under the terms of the indemnity.”
So whenever you try to be accepted for a transaction involving valid and highly rated securities, you should always remember that there are risks involved and you will have to be financially qualified to be accepted to be served.
Those people who come up with all sorts of reasons why they should get a “no front fee deal”, or transactions in which a borrower does not engage financially in any way will probably never get served.
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Would you provide a million dollar fortune to a client who can never account for potential losses with his own wealth?