Securities Lending

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

Securities lending may help you achieve your investment goals because a fund can generate additional income through the fee that it charges for lending securities. This may have the equivalent effect of offsetting management fees and reducing total cost of ownership. Over three decades, BlackRock has focused on delivering competitive returns while balancing return, risk and cost.

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Securities lending may help a fund generate additional income.
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Securities lending may reduce the total cost of ownership.
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What is securities lending?

Securities Lending is a long-established practice in the investment management industry, which is designed to generate additional revenue. Securities lending has evolved into a vital component of the financial markets. As of December 2019, more than US $23.9 trillion of assets were available for lending globally, with over US $2.3 trillion on loan on an average day (Source: Markit, 1 December 2019 to 31 December 2019). All amounts given in USD.

Risk: With securities lending there is a risk of loss should the borrower default before the securities are returned, and due to market movements, the value of collateral held has fallen and/or the value of the securities on loan has risen.

How does a lending transaction work?

Source: BlackRock. February 2020. For illustrative purposes only.

Securities lending involves the transfer of fund securities (such as shares or bonds) to a third party (the borrower). The borrower then gives the lender collateral (in the form of shares, bonds or cash). The collateral is held in a tri-party collateral account, separate from BlackRock. The value of the collateral is greater than the loan value and is marked to market every day.

The borrower also pays the lender a fee. The extra revenue generated from lending fees can effectively offset the cost of fund ownership.

Throughout the whole duration of the trade, the borrower is obliged to pass on any income arising from holding the securities to the lender. The borrower also has the obligation to return the borrowed securities to the lender, whenever the lender asks.

What is ETF unit lending?

ETFs are lent out in the same way as the underlying Equities or Bonds.

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ETF unit lending increases availability and demand for UCITs ETFs, reduces settlement fails, and promotes efficient pricing.

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ETF lending can be an important income stream. Lending fees are an efficient and low risk way to offset management fees and lower total cost of ownership.

How investors and markets may benefit from securities lending?

Securities Lending

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Improves liquidity in financial markets and promotes efficient pricing

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Improves fund performance

Source: BlackRock, February 2020. For illustrative purposes only.

In addition to potentially generating additional income for investors, securities lending may increase liquidity, facilitate transactions, mitigate price volatility and reduce transaction costs for end investors.

Since securities lending transactions can be used to facilitate short sales – where investors sell borrowed securities in anticipation of price declines – some have criticised securities lending as a risk to market stability.

In fact, the Federal Reserve has found that short sales improve market stability. Their research has shown that short selling does not systematically drive down asset prices, and that restricting short selling can lead to reduced liquidity and higher transaction costs for investors. This is driven by the dynamics mentioned above – securities lending and short sales help to improve liquidity and enable investors to hedge risk. (Source: Federal Reserve Bank of New York Staff Report no. 518, “Market Declines: Is Banning Short Selling the Solution?” September 2011. *This paper was published in the aftermath of the financial crisis.)

*We are not aware of any more recent publications by the Federal Reserve Bank of New York on this topic.

How do we lend securities at BlackRock?

We believe in managing our securities lending operations on our proprietary platforms. To that end, we have built a robust infrastructure so that every element of our lending activity is executed in our clients' best interests. At BlackRock our lending platform is fully integrated with our portfolio management teams, providing an information advantage over outsourced lenders.

Risk: While proprietary technology platforms may help manage risk, risk cannot be eliminated. There is no guarantee that a positive investment outcome will be achieved.

The BlackRock lending programme is also run with prudent risk management. Risk is managed by BlackRock's Risk and Quantitative Analytics (RQA) group, separate from the securities lending team. With securities lending there is the risk of loss should the borrower go out of business before the securities are returned and, due to market movements, the value of collateral held has fallen and/or the value of the securities on loan has risen. At BlackRock we approach this risk systematically:

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RQA determines whether firms can be approved borrowers and monitors them over time. New transactions are prevented if a borrower reaches their credit limits.
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In the event of borrower default, replacement securities are purchased with collateral that is of a high quality and liquidity.
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As an added safeguard in the event of borrower default our EMEA domiciled funds are protected under the terms of the indemnity, as described in our brochure.

Risk: While the investment approach described herein seeks to control risk, risk cannot be eliminated.

While every investment bears some risk, we take a rigorous hands-on approach to risk management and as a result BlackRock has delivered positive securities lending income for every fund participating in securities lending, since the inception of the lending programme in 1981. Please note, the programme was created in 1981 by our predecessor firm Barclays Global Investors, which was acquired by BlackRock in 2009 (Source: BlackRock February 2020). We’re proud of our track record in this respect because we feel it is a testament to our history of working passionately hard on behalf of our clients.

An evolving market

In last three years, both lending supply and borrow demand has significantly increased. iShares UCITS lending availability has doubled since March 2016 and demand is consistently higher, hitting an all-time peak of US$3.5bn in September 2019.

iShares UCITS ETF Unit Lending

iShares UCITS ETF Unit Lending graph

Source: IHS Markit, November 30 2019. Availability is the total USD notional supply of lending inventory. On loan is the USD notional of securities on loan. The EMEA ETF lending market is entering the third stage of evolution in terms of user behaviour.

The market for unit lending has evolved considerably over recent years. Original demand for EMEA ETF borrowing was driven by Market Maker fail coverage and settlement requirements. Over the past 12-18 months, a much deeper lending supply has afforded Market Makers greater flexibility in their primary activity. For example, they can now borrow ETF Units rather than create new ETF units or buy ETF units from another client (the traditional approach). More recently, ETF unit availability has reached a critical point where there is sufficient depth of supply for market participants to consider ETFs as another instrument to be used for hedging portfolio risk.

How may clients benefit from the evolving market of ETF unit lending?

With greater borrower demand and lending activity there is increased potential for ETF lending returns:
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ETFs are lent out in the same fashion as underlying Equities and Bonds.
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Increasing availability and demand for UCITS ETFs.
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Potential lending fees are an efficient and low risk opportunity to lower total cost of ownership (TCO).

Learn more about securities lending. Download our brochure today.

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Download our brochure

Download our brochure

Learn more about securities lending. Download our brochure today.

Download now