Funston: securities lending deserves own contract
21 July 2016 New York
Image: Shutterstock
Rising costs and a greater diversity of providers is leading pension funds to request unbundled contracts for securities lending and custody, according to Funston Advisory Services.
Funston’s independent audit of the New York State Common Retirement Fund, which is the third largest state US pension fund with $178 billion in assets, revealed that it is holding preliminary discussions to develop a new request for proposals for custodian bank services.
J.P. Morgan provided custody, securities lending and foreign exchange services to the fund under a five-year deal until June last year, with one-year extensions expected to continue the partnership until 2017.
“Following the credit market collapse of 2008-09, the New York State Common Retirement Fund and the majority of public pension funds adopted more conservative policies for securities lending,” according to Funston.
“Discussions with the New York State Common Retirement Fund suggest that the objectives and scope of its lending programme are likely to remain essentially the same in the next bid process. However, changes in markets, regulatory environment and technology have increased the range of options for lending securities.”
Unbundling would make it easier to end a securities lending or foreign exchange mandate without affecting the custody relationship, while maximising the opportunity to secure the best provider.
“While this approach may result in higher apparent costs for custody, it should improve transparency of actual costs, enhance securities lending and/or foreign exchange performance, and provide the opportunity to consider use of agency firms whose sole responsibility is to the client.”
Funston, which reviewed the State of New York’s retirement fund’s internal operations between 2013 and 2015, stated: “We believe this [separate mandates] would be the best direction for the fund, even if the same provider were selected for all three services.”
Funston’s independent audit of the New York State Common Retirement Fund, which is the third largest state US pension fund with $178 billion in assets, revealed that it is holding preliminary discussions to develop a new request for proposals for custodian bank services.
J.P. Morgan provided custody, securities lending and foreign exchange services to the fund under a five-year deal until June last year, with one-year extensions expected to continue the partnership until 2017.
“Following the credit market collapse of 2008-09, the New York State Common Retirement Fund and the majority of public pension funds adopted more conservative policies for securities lending,” according to Funston.
“Discussions with the New York State Common Retirement Fund suggest that the objectives and scope of its lending programme are likely to remain essentially the same in the next bid process. However, changes in markets, regulatory environment and technology have increased the range of options for lending securities.”
Unbundling would make it easier to end a securities lending or foreign exchange mandate without affecting the custody relationship, while maximising the opportunity to secure the best provider.
“While this approach may result in higher apparent costs for custody, it should improve transparency of actual costs, enhance securities lending and/or foreign exchange performance, and provide the opportunity to consider use of agency firms whose sole responsibility is to the client.”
Funston, which reviewed the State of New York’s retirement fund’s internal operations between 2013 and 2015, stated: “We believe this [separate mandates] would be the best direction for the fund, even if the same provider were selected for all three services.”
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