Basic HTML Version
The “new” service bundle features a wider set of
products that give asset owners more routes to
market for their supply. Synthetic lending via swap
and option positions, equity-for-equity and multi-
asset trades and ETF lending are increasingly being
offered together with traditional securities lending
transactions. This is being enhanced by new options
to utilize cash to finance nontraditional assets
and by increased flexibility to extend the term on
trades, particularly via repo. Finally, opportunities
to transform assets to satisfy collateral demand for
derivative postings are helping manage the challenge
of emerging Dodd-Frank and EMIR rules.
The expanded mandate is being facilitated by a
move to a more client-centric organization in many
lending banks. Enhanced sales coverage models are
emerging that can help a client allocate their portfolio
effectively across agency, principal, synthetic and
direct lending opportunities. They can also facilitate
upgrade and downgrade trades to meet derivative
collateral demands. These “solution” teams can work
across the Chinese Walls in place between various
parts of the business in an advisory capacity and
direct clients to product experts in multiple areas.
New organizational constructs that house all these
functions within a single division align incentives and
promote more effective cross-selling. Consolidated
decision-making at a management level around
technology is helping to prioritize projects that
normalize underlying data models and make it easier
for the organization to look holistically at the client’s
relationship with the bank while still ensuring all
required separations and safeguards.
All of these changes are providing a more flexible
approach for asset owners that will allow them
to better leverage the breadth of their lender’s
capabilities and expertise in maximizing the potential
of their supply.
Lending Organizations Develop More
Client-Centric Model
The traditional banking model developed with
broker-dealers and custody providers evolving
purpose-built organizations that sought to service
clients in a highly targeted manner.
Within the broker-dealer world, a set of services
evolved in the prime brokerage organization to
provide leverage, facilitate short trading and create
synthetic exposures. Originally, these services were
very equity focused but over time as fixed income
and multi-asset portfolios that required hedging
of unintended credit and interest rate exposures
became more common, these services evolved to
include clearing services for derivative transactions
as well.
In the custody world, agency lending was introduced
to expand the bank’s core custody and collateral
management and provide a stickier “bundle” of
services. The bundle offered asset owners new
options to generate incremental performance for
their funds through extended use of their fully paid
for supply and reinvestment of the collateral that
came in against securities put out on loan.
Due to the same trends of portfolios becoming more
multi-asset and in recognition of many portfolio
managers beginning to include OTC derivative
positions in their portfolio to hedge un-intended
credit and interest rate risk, many of these same
custodians began to introduce an outsourced OTC
derivative collateral management service to their
custody clients. The operational processes required
to handle these derivative products was often beyond
the systems capabilities and expertise of the asset
owners’ legacy organizations, and many looked to
their custodians to help cover this gap.
Each part of the bank created these services to fulfill
the needs of a specific client base. As such, both the
broker-dealer and the custodial bank would have their
own product sales teams and their own generalist
Section VII: Lenders Evolve Model to Optimize Use
of Clients’ Assets
To seize the opportunity presented by prospects for a surge in collateral demand for high quality
liquid assets (HQLA) and to create more optionality for their clients around the utilization of
their lendable supplies to supplement traditional agency lending programs, many organizations
are beginning to evolve their mandate to offer a broader set of services.