Well-Functioning Markets Boost Investor Interest in Securities Lending Programs, Despite Lower Returns

This update will discuss the key market dynamics impacting returns and risk in securities lending over the past year, and highlight our clients’ current perspectives on lending programs.

In general, the supply of securities available for lending outpaced demand in 2020, resulting in lower returns (offset slightly by a period of high reinvestment spreads in the wake of pandemicrelated interest-rate cuts). Despite the turbulence tied to the pandemic and the high volatility of the GameStop Affair, securities lending markets continued to function effectively. We continue to see increased interest in securities lending programs, which are increasingly becoming a differentiator for index-based investment management

The past 12 months continued a secular trend in the securities lending marketplace that has been in place since 2019. The value of securities available for loan (i.e., the supply) in the market has outpaced the amount of securities on loan (i.e., the demand) (see Figure 1). When supply outstrips demand, the outcome is predictable: price reductions. That is exactly what we have seen. Average spread per dollar on loan has declined from 45.9 bps to 43.7 bps since 2018.