International Finance
Ideas Magazine May-June 2019

Technology is finally democratising securities lending

Technology is finally democratising securities lending
For a long time, a group of financial institutions were the sole beneficiaries of securities lending–but that is changing with digitisation

The year 2018 brought a sea change across the global markets. Much of the ten years prior to 2018 were characterised by smooth and stable growth in asset prices. By comparison, 2018 was a tempestuous year, as volatility returned to the markets and global equity indices fell. Mainly, there-emergence of volatility caused much concern to investors. Many asset managers and investment banks, including HSBC and BNP Paribas, highlighted market volatility at the end of 2018 as a key driver for diminishing returns. Some analysts even heralded that 2019 would see the beginning of the next global recession, following the rough ride witnessed by the markets in the fourth quarter of2018.

A select group of asset owners, however, experienced 2018 in a very different light. Between them, they shared $10 billion in additional revenue by engaging in a practice which is described as one of the best-kept secrets in finance. What could this secret be? These asset owners engaged in the 50-year-old practice of lending out their stocks, bonds, and exchange traded funds in the same way, that many homeowners choose to rent out their home or, in other words, they engaged insecurities lending.

At its very core, securities lending presents a lucrative opportunity that all investors in stocks, bonds, and ETFs can benefit from. Furthermore, this additional revenue stream does not require investors to sacrifice their economic rights, other than the right to vote. Sounds cool, right? But despite all this, while the market capitalisation of global equities has trebled since the 2008 trough, the value of securities on-loan, a common measure for the size of the securities lending industry, is still way below its pre-recession highs, representing a ‘real’ shrinkage in the industry size.

So why has the securities lending industry failed to keep pace with the rest of the market?

Boaz Yaari
Boaz Yaari
CEO and founder
, Sharegain

Until now, securities lending operated as a closed ‘members club’. For decades, a small group of financial institutions, mainly pensions funds, asset managers, and ETF issuers, were the sole beneficiaries of securities lending. That’s like a housing market where only real estate conglomerates are able to rent. But even these institutions faced a trade-off. Either they had to invest considerable time and money in doing it themselves, or hand over control to someone else.

As a result, globally more than $40 trillion worth securities are idling instead of collecting income. These assets belong mainly to private investors, through their banks and online brokers, as well as small and medium asset managers, and digital wealth managers.

So how can we level the playing field and enable these investors to benefit from this basic right?

For most investors, securities lending is too complex, too opaque, and not user-friendly. While the rest of the world has moved to transparent pricing and user empowerment, securities lending is still heavily intermediated, traded over the counter, and is extremely opaque. Worst of all, securities lending requires a large investment of time and money, even though it will likely never be an investor’s primary investment objective –leaving them with little interest inactively managing it.

It can, however, become a secondary investment objective, if extracting additional value from a portfolio can be done with minimal risk and in a simple and transparent manner. In that respect, user-experience is not just a fancy dashboard with buttons and dials. Rather, it is the ability to deliver a simple solution which most investors can ‘set and forget’, retaining full control, transparency and the peace of mind. What the securities lending industry needs is to design an equivalent user experience to the one offered by modern day digital wealth managers.

At Sharegain, we offer a securities lending solution fit for the 21st century, which we have achieved by relentlessly focusing on the user. In doing so, our offering finally brings a fully automated solution that enables investors to set their lending appetite and let our technology work for them. By introducing the world’s first digital agent lender, we eliminated the need for operational overheads and high level proficiency in the technology, enabling all investors to benefit from this basic right. Our vision is to fully democratise the securities lending industry, effectively bringing the ‘Airbnb moment’ to the stocks, bonds, and ETFs of each and every investor.

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