According to Keith Haberlin, senior vice president of global securities lending at the agent lender Brown Brothers Harriman, since the financial crisis pension funds have been seeking to drive return from lending the securities themselves and not from the collateral.
Haberlin says that pension funds that have returned to the securities lending market have focused their programmes more on intrinsic value and are now looking for more third-party lending relationships. "In 2008, two main issues came together for pension funds. First, the collapse of Lehman Brothers – which was a huge borrower in terms of securities lending – was a big shock in the market. The second and more critical issue was linked to cash collateral reinvestments. Some of the cash that was taken from borrowers had been reinvested in vehicles that were more aggressive than warranted for securities lending, holding highly illiquid assets."
The difficulties pension funds faced were less a matter of credit – as most of the cash collateral was invested in AAA-rated funds – and more an issue of liquidity.
Securities lending remains a low-risk business, and most pension funds have now returned to the market, adopting a much more prudent approach, according to Haberlin.
He said: "Instead of looking at the total return, they look at the risk adjusted return, which is a more accurate measurement of performance. Pension funds are now more focused on lending assets in their portfolio with high intrinsic value".
Pension funds are also seeking to appoint securities lending agents as well as a custodian, Haberlin said, as "the third-party lending relationship primarily enables a better and deeper knowledge of the risk taken".
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