Shedding Light on Securities Lending

An OFR working paper released today analyzes new data measuring securities lending activity. A securities loan is a transaction in which the lender (a securities owner) temporarily transfers securities to another party (a securities borrower) for compensation.

Both securities lending and repurchase agreements (repos) play critical roles in our financial system in money and collateral markets. Analyzing and measuring activity in these markets are key components of the OFR’s work in shadow banking.

Securities lending adds short-term liquidity to financial markets — a vital function — but may also carry financial stability risks. During the financial crisis of 2007-09, significant losses from cash collateral reinvested in risky securities triggered liquidations that contributed to instability in global financial markets.

Several steps have been taken to mitigate such risks since the crisis. For example, lenders improved collateral management policies.

High-quality data are essential to assess and monitor risks in collateral markets, but until now, little data have been available describing securities lending activities. That changed last year when the OFR, Federal Reserve, and staff of the Securities and Exchange Commission conducted a joint voluntary data collection project. The paper, “A Pilot Survey of Agent Securities Lending Activity,” presents the results from that data collection.

A key aspect of the OFR’s mission is to shine a light into the dark corners of the financial system by filling gaps in financial data. Along with an earlier pilot project by the OFR and the same agencies to collect data about bilateral repos, this data collection marks another milestone among those initiatives.

During the recent survey, data were collected for three days in 2015 from seven securities lending agents — mostly units of large banks that bring together securities borrowers and lenders. The agents also help manage the loan collateral.

The agents reported about $1 trillion in outstanding daily loans, or 11 percent of the total $9.4 trillion in securities available for lending.

Investment firms were the largest lenders. They had nearly $3 trillion in securities available to lend. Pension funds and endowments had about $2.5 trillion in securities available. Smaller lenders were sovereign wealth funds, insurers, banks, and broker-dealers.

The biggest borrowers were broker-dealers, which borrowed an average of $869 million in securities each day. Banks and credit unions were a distant second at $142 million, followed by state pension funds and hedge funds.

Most often, borrowers sought U.S. equities. Stocks made up an average $315 billion of the securities loaned during the survey dates. U.S. Treasuries and government agency securities made up about $302 billion.

Collateral from borrowers split about equally between cash and noncash.

Based on the survey results, the Financial Stability Oversight Council recommended in its 2016 annual report permanent data collections for bilateral repos and securities lending, and the OFR is committed to carrying out those recommendations quickly.

Richard Berner is Director of the Office of Financial Research