Sizing Up Solution Providers in the Securities Lending Market

Executive Summary

While still below the pre-financial crisis level of US$3 trillion, the volume of securities lending transactions has recovered somewhat, reaching US$2.1 trillion in December 2018. The ratio of utilization of lendable securities, however, remains just shy of 10%, far below the 19% recorded in early 2008. This situation points toward an evolution of the market where supply is now abundant, but demand is still mediocre. 

Securities lending transactions generated US$10.7 billion of revenue last year, a significant portion of which was captured by prime brokers and broker/dealers that provide essential intermediation services between borrowers and lenders. The securities lending market is still a relationship business with very little electronic trading and where agent lenders and prime brokers represent choke points that borrowers and lenders—except the largest asset managers—need to go through in order to access the market. 

The US market is by far the largest, accounting for 47% of global revenue, followed by Europe with 31% and Asia at 22%. In terms of asset classes, equities lending generates the lion’s share of revenue with over US$7.2 billion in 2018, followed by government bonds, which accounted for just 18% of overall revenue.

In the European Union, the new Securities Financing Transactions Regulation (SFTR) will pose a significant challenge to securities lending market participants, requiring more than 150 fields related to transactions to be reported. This regulation will go through a phased implementation during 2020 and will not only apply to European entities active in securities lending, but also to foreign ones conducting such transactions with a European counterparty. 

The new regulatory requirement will represent a significant opportunity for securities lending software solution providers to deliver reporting services to market participants. Opimas estimates that, thanks to the combined effects of SFTR and legacy system upgrades, the post-trade solutions market in securities lending will grow from US$350 million in 2019 to close to US$400 million in 2021 (see Figure 1).

Figure 1. Securities Lending software Solutions Market Size

Source: Opimas

With software solutions for securities lending, there appears to be a clear segmentation between North America and the rest of the world in terms of market share.  In the US, FIS’ Loanet has an entrenched position with over 250 different entities as clients.  Opimas estimates that Loanet has over 60% market share among US entities involved in securities lending activity.  The strong network effect that this solution enjoys in its home market significantly increases the barriers to entry for its competitors, despite being the oldest software currently available. In foreign markets, the level of competition is certainly much healthier,  with numerous dedicated providers of securities lending software solutions, as well as suppliers of collateral management solutions that have expanded the coverage of their platforms to also include securities lending activity.   However, it should be noted that in Europe, UK-based Pirum, which provides a SaaS based centralised solution to automate the reconciliation and post-trade life cycle in securities lending, has a very significant level of penetration amongst Tier I players.

Finally, it is worth mentioning that a FinTech start-up called Sharegain has developed an offering to open-up the securities lending market to asset owners such as high-net-worth (HNW) retail investors and wealth managers that have typically been ill served by incumbent players.

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