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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
Equity & Bond Lending Trends Begin
to Diverge
Five years on from the GFC, the move toward intrinsic
lending is beginning to affect the broader market
dynamics. More and more of the unutilized supply in
lending programs is becoming general collateral and
this is resulting in a significant shift in the composition
of lendable assets. Markit shows that 66% of the
total lendable pool of assets as of December 31, 2013
was comprised of equities—a figure equal to $10.1
trillion. Only 34% of the lendable pool or $5.4 trillion
is comprised of bonds. This marks a significant shift
in the market.
Chart 15 shows that equities have never exceeded
59% of the total pool of lendable supplies in previous
years back to 2007 and that these assets actually fell
to as little as 47% of the lendable pool at the height of
the Global Financial Crisis. This shift toward equities
is even more dramatic when viewed in dollar terms.
In 2007, the pool of lendable equity assets was $8.7
trillion. By Q2 2014 the figure jumped dramatically to
$10.1 trillion.
This increase in the value of the lendable equity supply
can be directly linked to the increase in the underlying
equity markets. There is a direct correlation between
changes in the value of the underlying equity markets
(as measured by the broad market indices) and
changes in the value of the lendable equity supply.
Given the maturity of most lending programs, this
makes sense as very few new participants are entering
the lending arena of sufficient size to significantly
alter the overall pool.
The comparable bond figures for those years show a
markedly different pattern. Markit puts the pool of
lendable bond assets at $6.1 trillion in 2007shows
that these supplies fell to a record low of $4.8 trillion
in 2009 and have since recovered only modestly to
$5.4 trillion at the end of Q2 2014. Thus, the pool
of lendable equity assets expanded by 16% between
2007 and 2013 whereas the pool of lendable bond
assets fell by 12%.
We have already touched on the four reasons
underlying reduced lendable bond assets—1) much
of this has to do with the extended low-interest rate
environment; 2) the need for dealers to limit short-
dated repo transactions given new Basel III risk
weightings on short-duration trades; 3) the costs of
reserving capital against match book trades required
“ Oftentimes, moving GC around can cost more than you make.
Pre-Lehman, you didn’t need to worry about cost because the
specials market was so good and the GC pool was so big and
stable,” — Agent Lender
“ People have to be getting GC trades done for 10-25bps
minimum spread before they are willing to do a loan. This
spread has to be made on just the loan—not on any re-invest.
40%-50% of the beneficial owner market now has this floor,”
— Securities Lending Consultant
“ We try to manage our securities lending program so
that we have the minimal amount of risk exposure.
80% of our revenue comes from 20% of our volume,”
— Asset Owner—Money Manager
Source: Markit
Equities as Percent of Total Lendable Assets
Chart 15: Equities as a Percent of Total Lendable Supply
59%
65%
47%
2007
2008
2009
2010
2011
2012
2013
Q1 2014
Q2 2014
55%
57%
59%
45%
55%
65%
60%
50%
66%
70%