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At the end of 2015, the value of securities on loan totaled more than $2 trillion.3 Securities lending can modestly enhance an investment The Shadow knows. %PDF-1.5 endobj It begins by presenting the institutional structure, and then describes the market landscape, the role of the participants, and other characteristics, including how repo and securities lending activity has changed since the 2007-09 financial crisis. Securities lending plays a significant role in today’s global capital markets. "Indeed, SL played a supporting role in the 2007-09 financial crisis, being partly responsible for the collapse of the large insurance company AIG when the market seized in September 2008 (see chart). And, like other short-term funding sources, it can suddenly dry up, …

3 0 obj Insurers have a variety of assets—bonds, equity, real estate and the like. The result of … endobj To understand what is going on, it helps to look at a simplified balance sheet of an insurance company.

For example, based on book value as of end-September, MetLife’s leverage (the ratio of total assets to net worth) was 12.8. (For complete details on the mechanics, see Why would someone borrow a security and why would someone lend one? In an SL transaction, one party lends a security to another in return for either cash collateral or some other security plus a fee. Typical insurance company engaging in a securities loanThe second thing to note is that the securities lending transaction facilitates banking activity. The private placement bonds are both less liquid and longer maturity than the cash collateral obtained through the SL transaction. The Eurosystem is primarily targeting market participants with market-making obligations and is monitoring the securities lending activities closely so as to ensure the ongoing effectiveness of the arrangements. <>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/Annots[ 7 0 R 13 0 R] /MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> Borrowers’ needs—the demand for SL—arise from several factors. Their liabilities are a combination of obligations to customer/policyholders and debt. Securities lending is the act of loaning a stock, derivative or other security to an investor or firm. <> Importantly, the loan is normally over-collateralized (that is, the collateral value exceeds the market value of the security on loan) and open-ended, with both sides having the option to terminate at any time. According to their analysis, the securities lent tend to be marketable corporate bonds while those purchased using the cash collateral tend to be private placement securities. examine the SL activities of insurers at the granular level of individual securities. Typically, the prime broker borrows “hard to borrow” securities and provides them to clients to short the stock or for other purposes.

The Fed had to substitute for the evaporation of private intermediation to avoid a chain reaction leading to systemic collapse (see Of course, these risks have not escaped the attention of Put differently, we need to force financial system risk out of the shadows. Like repurchase agreements (repo) and asset-backed commercial paper, SL can be a source of very short-term wholesale funding, allowing a shadow bank to engage in the kind of liquidity, maturity and credit transformation that banks do.

To give a sense of scale, take the example of Insurance companies are among the most highly leveraged financial intermediaries in the United States, with leverage well in excess of the average commercial bank. <> This is why Foley-Fisher et al. Securities lending involves the owner of shares or bonds transferring them temporarily to a borrower. Securities lending (SL) is one of the less-well-publicized shadow banking activities. The aim of our securities lending is to help the financial markets keep functioning smoothly.

While SL has not garnered the attention of capital and liquidity regulation or central clearing, or even repo markets, it is still worth understanding what securities lending is and the risks it poses. 2 0 obj The practice improves overall market efficiency and liquidity, provides a critical element for hedging, acts as a useful tool for risk management for both trading and investment strategies, and helps to … In return, the borrower transfers other shares, bonds or cash to the lender as collateral and pays a borrowing fee. <>>> In a traditional securities lending transaction, securities are lent short-term after provisions such as loan length, collateral type (cash or securities) and rebate rate … Why does the Eurosystem lend its securities? Stock loan or securities lending is a critical part of both the financial services offered to hedge funds and the financing for the prime broker and investment banks.

endobj stream At that time, when securities borrowers chose to terminate the SL transaction and recall their cash collateral, the Federal Reserve felt forced to step in and provide loans collateralized by the assets. The aim of securities lending is to support bond and repo market liquidity without unduly curtailing normal repo market activity. x��k�����~���>I����&H�$v�N?���;7��].���,��%w(�C�(�$rwfvv�;d�������?��IVn6٣'��G/��{�LdB��^��Od%���e�UfMU�&{����2�ď�ݿ�r����^|{��S��=��q���xY�u����ά2EC�_�^�B��^�R��?����e_&��M������`=p��e��'\�ò�f��%|)���?��Fh�+�yX*�h#��R4�F�(�Y���,E�l`�0O6� 4 0 obj