It is becoming increasing important for beneficial owners to gain a deeper understanding of how returns are generated from their lending programmes if they are to optimise the revenues, delegates heard at the Global Custody Forum in London this week.

Simon Lee, managing director of business development, EMEA and APAC, eSecLending, said: “It cannot be stressed enough, how much the cost of regulation is affecting performance for beneficial owners, now and in the coming years.”

From the increasing regulatory costs borrowers, in terms of the collateral they hold and pledge, to those on agent lenders indemnifying clients, as well as how counterparties are “not treated equally” in the market, there are many considerations that inevitably affects revenues. “If you combine all of those factors, there is a significant variance in lender performance,” said Lee.

He added that to optimise programmes beneficial owners “really need to understand how regulatory costs are affecting them, their service providers and those that are borrowing their assets. If they address those questions, they can position themselves very well to optimise their portfolios”.

In a few years, Lee expects to see that the “beneficial owners that have engaged and addressed those issues and optimising performance, securities lending revenue will become more and more important part of their day-to-day… management of fund performance.”

“Those beneficial owners that don’t – those at the lower end of the spectrum with smaller portfolios – I can see some of them walking away. If a programme is structured such that borrowers do not want to borrow the revenue may not justify participating.”

Ali Kazimi, managing director, Hansuke Consulting, said that while there are perhaps more lenders than ever, and almost all had returned that left or suspended programmes during the crisis, the terms under which they did so were very different.

“In the lending arena it becomes more sophisticated very quickly. What is the quality of the terms both on the agency side, the principle agreement you have, and also on the street side – the tax transfer and the effects they have – all very important now.”

He added that understanding counterparty risk and tax implications were also very important.: “What you are seeing now is tax policies that cover the lending book. And, I think this is going to increase even more.”

Bill Foley, director, Foley O'Neill, added: “Lending has a very healthy future, but a different one that will be driven by regulation and technology. There will be new routes to markets and, if we think about how SFTR reporting will be addressed, even now companies are putting together the ways to connect to trade repositories.

“The opportunities for beneficial owners will be vast, yet different.”