Securities lending enables a wide variety of investment strategies such as hedging as well as providing investors with a low risk source of incremental revenue on their portfolios. An asset owner which lends securities receives in return collateral in the form of other securities or cash.

Since the financial crisis, institutional investors such as pensions and insurance companies have gotten a much larger slice of the securities lending pie as banks have scaled back.

“Beneficial owners are much better informed about how the stock loan industry works,” David Carruthers, co-head of Markit’s securities finance business, told Markets Media. “Some of them who pulled out during the credit crunch are now thinking about coming back into the industry.”

For institutions, securities lending provides a relatively safe way to make extra return on their assets. Stock loans are often guaranteed by custodians.

In its most basic form, securities lending involves the borrowing of stock by one party, often for short-selling purposes, and a concomitant contractual obligation to the lending party.

“For example, if you’re betting markets in futures contracts, you might want to hedge that by short selling the underlying constituents and to do that you have to borrow stock,” Carruthers said. “So you pay a rental fee, ultimately to a pension fund or an insurance company or someone like that that holds the stock. But it comes through the agent lenders—the custodians like State Street, JP Morgan, and BNY.”

Hence, securities lending establishes a value chain whereby the big pension funds, mutual funds, and insurance companies are lending stock through custodians, then to banks and ultimately to hedge funds, who do short selling to express a negative view of a company.

Markit’s securities finance database covers over $15 trillion of securities in the lending programs of over 20,000 institutional funds and tracks loan balances of approximately $2 trillion.

Through an agreement with Pirum, which provides automation for post trade securities finance processes, mutual customers of Markit and Pirum can use Pirum’s data hub to deliver intraday and end of day trade data to Markit’s securities finance global data set.

Pirum provides a service called “contract compare,” which automatically compares contractual details of all open trades and collateral pledges with counterparties, thereby providing assurance that books and records are accurate and complete.

“This initiative enables Nomura to participate in Markit’s enhanced securities finance data service while utilising existing connectivity with both Markit and Pirum,” Ben Challice, managing director and global head of equity finance at Nomura, said in a release. “Intraday market data will be an important tool for analysis and trade execution activities.”

Pirum is one of two companies that provide contract compare, the other being EquiLend, according to Carruthers.

“Because it’s not an exchange-traded industry, you need some way of making sure that agree who you’ve traded with and what you’ve traded with them,” he said. “A lot of people participating in stock loans have got their day to day trades going through Pirum, and that includes some of their intra-day trades, or trades that they agree with someone that gets settled part way through the day.”

Previously, Markit only collected end-of-day data, Carruthers said. “Our clients would like to see higher frequency updates on volumes and rates, so if we can capture that intra-day data we can get our clients intra-day as well,” he said. “This Pirum relationship allows us to do that.”

It also allows Markit to capture trades pending, which are trades which have been agreed but not settled. “That’s a big thing in Europe,” Carruthers said. “So it gives the traders more visibility into what’s coming down the track in terms of demand and supply. Pirum also have collateral data which is quite important to determine our stock loan rates.”

Featured image via mejn/ Dollar Photo Club