Simplifying oversight management for securities lending
21 February 2022
Having the right oversight can optimise lending performance, improve operational efficiency and enable a lender to manage their risk more effectively, says IHS Markit’s Rob Nunn
Image: stock.adobe.com/Julian Peters Photos
Every institutional investor participating in a securities lending programme approaches the oversight of its programme in different ways. This ranges from having a dedicated resource to oversee the programme, to a part time oversight delegated function, to a compliance or risk team member. Scrutiny of the lending programme can range from rudimental checks, for example sufficiency of collateral, to a daily review at trade level to ensure the agent has optimised every loan.
But what is the appropriate level of oversight and attention?
Some regulators have addressed this question not as a regulatory requirement but as a set of “best practices”. Best practice is open to interpretation and some default to the minimum level of oversight, while others take a more in depth and detailed approach to ensure their fiduciary, performance management and independent governance requirements are met.
Having the right oversight and governance framework in place can improve operational efficiencies, optimise performance and enable a lender to better understand and manage their risk. A well-structured framework will assist in managing internal stakeholders and board requirements. Having the right tools enables a lender to focus on verifying that their programme is operating within its defined parameters, capturing opportunities and highlighting sources
of outperformance.
It is generally assumed that independent oversight of a securities lending programme is a necessity, but we recognise this is not always high on the list of areas to improve or even future-proof. Regulators have started to focus more on delegated functions and are looking for improvements — which is only one step away from making it a requirement. But the all too familiar story is that it is not a priority — “it’s eleventh on my top 10 things to do” — is understandable, especially given all the current regulations a lender must meet and plan for.
IHS Markit provides an Oversight Management Solution specifically tailored to improve governance, independent of the lending agent. This enables our clients to:
• Receive daily compliance reports which track the programme’s lending parameters.
• Proactively manage loan positions to avoid failed sales by monitoring the liquidity of the loaned securities.
• Monitor open loans of forthcoming proxy voting meetings, while assessing their impact to revenue and providing access to liquidity loan information to ensure timely recalls are put in place.
• Identify unrealised revenue opportunities.
• Receive performance and risk reports generated at fund or programme levels and tailored to clients’ requirements and desired frequency.
• Receive consolidated reporting when multiple agents are used.
• Control and set the peer group and benchmark that their programme is measured against.
We believe that having access to our solutions helps clients to quickly identify exceptions, understand performance and risk, and uncover potential opportunities to fully optimise their lending programmes. We appreciate the prudent practices applied by our clients and we can help them to assess whether they should participate in securities lending, or expand their programme parameters, by evaluating the potential risk when changing acceptable collateral, approving different markets or asset types. Our solutions can also be tailored to meet bespoke requests to supplement programme reviews, reporting for internal stakeholders, and to assist with RFPs by providing revenue evaluations.
Our solution is not meant to replace the relationship a client has with its lending agent, but our experience shows it can enhance it. It provides greater transparency and understanding of their lending programmes, helps exceed best practice and potentially future proof a lending programme from future regulations.
We are sure that some, if not all, of what we say resonates with lenders. Our new Oversight Management Solution is meant to improve something that mostly goes under the radar in many organisations — that is until there is a market event which grabs the attention of those that have not fully grasped the mechanics of the transaction or the importance of the revenue generated for the fund. Having better governance provides better understanding, management, and control of a securities lending programme, thereby ensuring that more informed decisions are made to protect and grow the business.
The best solution for lenders is understanding what they do today, how, and why.
But what is the appropriate level of oversight and attention?
Some regulators have addressed this question not as a regulatory requirement but as a set of “best practices”. Best practice is open to interpretation and some default to the minimum level of oversight, while others take a more in depth and detailed approach to ensure their fiduciary, performance management and independent governance requirements are met.
Having the right oversight and governance framework in place can improve operational efficiencies, optimise performance and enable a lender to better understand and manage their risk. A well-structured framework will assist in managing internal stakeholders and board requirements. Having the right tools enables a lender to focus on verifying that their programme is operating within its defined parameters, capturing opportunities and highlighting sources
of outperformance.
It is generally assumed that independent oversight of a securities lending programme is a necessity, but we recognise this is not always high on the list of areas to improve or even future-proof. Regulators have started to focus more on delegated functions and are looking for improvements — which is only one step away from making it a requirement. But the all too familiar story is that it is not a priority — “it’s eleventh on my top 10 things to do” — is understandable, especially given all the current regulations a lender must meet and plan for.
IHS Markit provides an Oversight Management Solution specifically tailored to improve governance, independent of the lending agent. This enables our clients to:
• Receive daily compliance reports which track the programme’s lending parameters.
• Proactively manage loan positions to avoid failed sales by monitoring the liquidity of the loaned securities.
• Monitor open loans of forthcoming proxy voting meetings, while assessing their impact to revenue and providing access to liquidity loan information to ensure timely recalls are put in place.
• Identify unrealised revenue opportunities.
• Receive performance and risk reports generated at fund or programme levels and tailored to clients’ requirements and desired frequency.
• Receive consolidated reporting when multiple agents are used.
• Control and set the peer group and benchmark that their programme is measured against.
We believe that having access to our solutions helps clients to quickly identify exceptions, understand performance and risk, and uncover potential opportunities to fully optimise their lending programmes. We appreciate the prudent practices applied by our clients and we can help them to assess whether they should participate in securities lending, or expand their programme parameters, by evaluating the potential risk when changing acceptable collateral, approving different markets or asset types. Our solutions can also be tailored to meet bespoke requests to supplement programme reviews, reporting for internal stakeholders, and to assist with RFPs by providing revenue evaluations.
Our solution is not meant to replace the relationship a client has with its lending agent, but our experience shows it can enhance it. It provides greater transparency and understanding of their lending programmes, helps exceed best practice and potentially future proof a lending programme from future regulations.
We are sure that some, if not all, of what we say resonates with lenders. Our new Oversight Management Solution is meant to improve something that mostly goes under the radar in many organisations — that is until there is a market event which grabs the attention of those that have not fully grasped the mechanics of the transaction or the importance of the revenue generated for the fund. Having better governance provides better understanding, management, and control of a securities lending programme, thereby ensuring that more informed decisions are made to protect and grow the business.
The best solution for lenders is understanding what they do today, how, and why.
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