New York Securities Financing Forum: Risk vs. reward - Agency Lending 2 years on

Thu, 2011-05-26 20:23

Risk vs. reward - Agency Lending 2 years on

Panelists:

  • James McDonald, State Street
  • Chris Poikonen, eSecLending
  • Judy Polzer, JP Morgan
  • Reeve Serman, RBC Dexia
  • Moderator, Jackie Noblett, Ignites

This panel discussed how the agent lenders are faring - braced with the twin threats of demanding beneficial owners on the one side and the balance sheet challenged brokers on the other. Some on the panel, and within the audience, suggested that the funds who lend have unrealistic expectations at present:

  • 44% of the delegates polled think that the risk of beneficial owners is higher compared to a year ago;
  • 32% believe it to be lower;
  • and 24% think it remains unchanged.

It was proposed by one panelist that there has been such a strong focus on risk, that the pendulum has swung so far that it is extremely hard to match the income expectation given the level of risk that is tolerated. In other words, it’s important that the market work to demystify Beneficial Owners’ perception of risk.

The majority of the audience (56%) believes that when setting their income expectations, beneficial owners do not understand how much the industry is changing. The general market offers limited opportunity for income at the moment, regardless of whether or not risk appetite has changed.

One agent lender suggested that asking whether or not the beneficial owners are “sophisticated” is focusing on the wrong term.  She went on to suggest that the industry should instead be asking, “are they less complacent and less willing to put their securities into any program that the Custodians choose?”

It was agreed that there should be greater dialogue amongst the lenders and the investment professionals (CIOs, PMs). If the lenders are able to feed back information to the fund managers as to why their securities are in demand, this is another reason to operate a securities lending program – for the added intelligence available.

Overall, beneficial owners are more sophisticated and their revenue expectations have not been lower. On top of that, they require more reporting, more benchmarking and more rigorous rules. This is no doubt a challenging situation if you are an agent lender.