For invstors considering or reviewing their approach to lending their portfolios, here are 10 timely reminders from Mark Faulkner of consultants securities finance international in London:

1. Assess the attractiveness of your portfolio(s) for lending
(value lies the eyes of the borrower)
l Size of the total portfolio
l Size of individual holdings
l Investment strategy: Active or passive
l Geographic and sectoral diversification of the portfolio
l Tax position or jurisdiction of the beneficial owner

2. Decide on your optimal route (you may take more
than one)
l Don’t lend
l Lend via your custodian(s)
l Lend via third party agent(s)
l Lend to principals on an exclusive basis
l Lend directly to multiple principals

3. Select provider options from chosen route(s) carefully
(they are not created equal)
l Prepare a detailed series of questions and get
them answered
l Insist upon client references – particularly from your “peers”
l Clarify limitations and conditions you will impose on them –
it is only fair that they know how you will be to deal with
l Define specific performance objectives
l Agree detailed service level
l Establish a regular review timetable

4. Obtain estimates of the portfolio(s) revenue generating potential (this may vary significantly)
l Provide information on any restrictions, or other limitations and conditions as above, such as maximum lendable percentages of the whole program, by asset classes or individual security
l Get the estimate in writing from a number of possible counterparts or agents with whom you may start contract negotiations (this will help ensure that the estimate is current as contracts may take three months to negotiate and sign)
l Insist on precision – whilst this is not a science, there are
numerous variables
l Make sure that any “assumptions” made are explicit
l Agree a “change procedure” – eg what would happen if portfolio composition changed?

5. Seek and obtain “buy in” from all relevant senior staff
(securities lending is frequently poorly understood and
opportunities missed, or problems caused, thereby)
l Fund managers
l Credit and market risk managers
l IT and operations
l Legal, tax, regulatory, and compliance

6. Set an appropriate risk management policy (and
ensure ongoing compliance)
l For the program overall
l Per counterpart
l Per activity
l Adopt an appropriate margin and collateral policy

7. Perform continual ongoing monitoring of your balances
l For the program overall
l Per counterpart
l Per country
l Per asset class

8. Understand the reason behind your risk exposures
l Ensure a “consistency of policy”
l Review collateral quality and appropriateness
l Examine margin levels
l Counterpart selection (you can select who you deal with)
l Explore the value of any indemnity and the cost that you
might be paying for it

9. Review your revenue - on a risk-adjusted basis
(there is no such thing as a “free lunch”)
l For the program overall
l Per counterpart
l Per country
l Per asset class

10. Constantly assess the impact, if any, of securities lending on
your core investment activity
l Settlement efficiency (the potential for reputational
damage in some markets is very significant)
l Corporate governance issues eg voting
l Corporate actions
l Dividend and coupon cash flows
l Rights and bonus issues
l Conversions of bonds and warrants

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