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In a sense, these organizations are pursuing the same
path as their former agent lenders in trying to create
multiple paths to utilize their supply. They have
recognized that their own asset pools are split across
internal silos and that, as a result, they are losing out
on optimization benefits.
These organizations are bringing together teams
mandated with looking holistically at the asset
owners’ total pool of supply. This includes not only the
assets earmarked for lending, but also their financing
obligations, derivative collateral obligations and even
their treasury and FX demands.
This is a daunting challenge for these asset owners.
There is the organizational component of having
a team that works across legacy silos; a people
challenge in terms of identifying, hiring and incenting
individuals with the right skill set to run these teams;
a governance challenge in terms of creating the
right engagement and incentive model between the
optimization team and the actual portfolio managers
that own the supply; an operational challenge
in understanding and aligning all the collateral-
related documents across the many product areas;
and, finally, a technology challenge in having the
systems in place to monitor, administer and enable
the optimization.
For this reason, many asset owners are likely to
forego creating their own capabilities and instead
look to the sell-side to provide a more optimized
offering. Only the largest organizations with internal
asset management capabilities and broad sets of
convergence products are likely to pursue this path of
building their own units.
Liquidity Management Requires the
Full Lending Toolkit
Earlier in the paper, we noted that post-GFC, some
asset owners insourced their cash reinvestment
programs (Chart 10) and that others took a broader
cash management approach by insourcing their
repo and cash reinvestment capabilities (Chart 23).
This dismantling of the traditional agency lending
bundle reaches its culmination among the subset of
asset owners that have opted to insource all three
components including their stock loan capabilities
in order to better manage their holistic liquidity
programs. This is illustrated in Chart 35.
Organizations that have chosen to go this route are for
the most part large asset management houses that
are running a broad mix of funds, many of which will be
holding derivative positions and/or using alternative
trading techniques like financing and shorting. With
Section VIII: Some Asset Owners Insource Lending for
Better ‘Liquidity Management’
As the new “bundle” of services evolves to anchor agent lending as part of a broader set of
supply optimization services from the sell-side, there are a sub-set of asset owners that have
moved in the opposite direction. Rather than looking for their agent to provide more flexibility
and options for utilizing their supply, they are insourcing all the aspects of their traditional
lending programs in order to have better control over their own liquidity management.
Source: Citi Business Advisory Services
Chart 35: Shifts in Securities Lending Service Model
Post-GFC: Changing Approach to
Liquidity Management
Pre-Crisis
Post-Crisis
Asset Owner
Asset Owner
Source of Service
Lender
Lender
Oversight of Service
Cash Reinvest
Repo
Stock Loan
Stock Loan
Repo
Cash Reinvest