Securities lending in 2023: So far, so (very) good.

CACEIS’ Securities Finance desk takes a look at the current lending market, the hot topics that might drive change, and the opportunities this year for clients looking for extra performance.

Off to a good start: a very positive Q1 for lending revenues

The industry had doubts about how it would top the exceptional year 2022 but we are doing well so far. Total securities lending industry revenues for Q1-2023 are up 24.5% on the same period in 2022, reaching $3.414bn according to S&P Global. This makes Q1-2023 one of the best performing quarters in recent history, with an average lending fee of 53bps - up 39% on the same period in 2022. DataLend confirmed this, revealing a year-onyear worldwide increase across all asset classes of 27%, even with a 5% fall in loan balances.

How do we explain these excellent figures? Firstly activity on US equity specials continues to heat up, and in the EMEA equities space, Swiss equities have pulled ahead. The only notable decline has been on ETF activity. On the fixed income side, corporate bonds fees are on the rise but with the liquidity that will become less abundant, especially with the end of TLTROs and various ECB programs, we all anticipate a rising demand for HQLA assets as well. The second semester will be very interesting indeed.

What are the industry hot topics in 2023

Regulation is the first topic for the lending industry. The main focus now being on the incoming Basel CRR3 and CRD6 putting pressure on balance sheets, which shall push for more client selectivity from agent lenders based on capital requirements and RWA consumption. Regarding CSDR’s settlement disciple regime, we observed that it is now well established but questions around a mandatory buy-in process scheduled for 2025 remain, although it seems SFTs will be exempt. Another theme is coming from the level 1 review of UCITS and AIFMD which might constrain buy side players acting as agent lender for their own funds to justify on the split of the revenues they take.

A second key topic is indemnification, as it is still a dilemma for agent lenders that haven’t yet stepped up to solve it. Indeed, these clauses are somehow still offered to clients despite the high cost of it. That is why, for instance, some agents now favour special transactions, stating indemnified GC transactions lack profitability, but clients are not ready to give up this clause and agents are struggling to stop providing it, aware of the fierce competition.

The third topic we can identify is obviously the challenges of technology. Similar to any industry, we need more data and granularity to answer clients’ and market players’ needs. For example, we need finetuning benchmark data especially for less liquid small capitalisation or corporate bond type assets to ensure clients have benchmarks aligning with best execution standards. Another example would be on the