Securities Lending Enters the Market Mainstream

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If markets continue to be difficult next year, then more pension funds may enter the securities lending arena for the first time in a hunt for enhanced revenues.

Mark Faulkner, chief executive of Securities Finance Systems (SFS) the UK-based risk management systems provider founded by Faulkner and Charles Stopford Sackville in 1998, says: "Our experience is that pension funds, like every other asset manager, will be sharpening their pencils and looking for ways to cover costs and generate revenues.

"They will be dusting down old files on securities lending, which were not necessary during the rampant bull market."

The pension funds of Imperial Chemical Industries (ICI), the UK chemical company, and the BBA Group, the UK group serving the industrial and aviation markets, have already announced their intention to consider securities lending (see table).

Meanwhile, the [pound]3.8bn (E6.1bn) London Regional Transport pension scheme expects to make [pound]250,000 for its first full year of lending securities. Its securities lending programme, run by JP Morgan Chase, its global custodian, has so far produced returns of [pound]68,000 for the half-year ending March 31, 2001. At year-end, the LRT fund was lending [pound]128m against [pound]132m taken in collateral.

Financial News analysed the annual reports of 30 pension funds to determine the securities lending practices of UK-based schemes.

More than a quarter of the UK pension funds analysed generated additional revenues via securities lending programmes.

Only five of the 10 funds that reported securities …