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Securities Lending

Securities Lending is the act of large financial institutions with long positions in securities ‘lending’ out those positions to prime brokers to further lend to hedge funds and investors that want to short the particular security. The process creates incremental revenues for many of these large financial institutions; most commonly mutual funds, pension funds, insurance companies and offshore investment funds that have massive amounts of capital within their portfolios.

The size of the market is estimated to be a staggering $717 billion for US equities. One of the crucial points to note is the lack of a widespread functional exchange in which to transact security lending agreements. Security lending transactions still occur almost exclusively over the phone. It is one of the few transactions in today’s market that agreements are only reached by a prime broker picking up the phone, calling an asset manager and looking to set the terms of agreement.

Equity positions are lent out to brokers, hedge funds and proprietary trading desks with 102% – 105% collateral provided to the lending firm, giving these firms even more cash to invest in other securities; most commonly short-term money market investment vehicles. However, during the brunt of the crisis news surfaced that some institutions were in fact putting the capital in much higher risk securities such as mortgage-backed investments. This remains a potential risk to investors who have bought shares of mutual funds or ETFs (Exchange Traded Funds). If the ‘lent out’ capital is reinvested in risky assets and losses on those positions occur, this loss of investment on the collateralized securities carries through to the total performance of the fund.

What determines the fees and revenue generated by the lending firm? It is a combination of factors including: length of the loan, size of the loan, availability of the security in the open market, and stock-specific measures such as dividend amount on the underlying security. Estimates on how lucrative the business is pegs lenders such as mutual funds and pension funds making anywhere from 1 to 2 percent per annum on the loaning out of positions, while prime brokers are making between 3.5% and 7.25% over the same period.

Each transaction depends on the stock but can bring as little as 0.01% per transaction or as much as 0.40%. Securities in extremely high demand can fetch all the way into the double digit percentage points, as seen by Citigroup in 2009 when hedge funds anted up to pay as much as 13% for getting a lot of the shares to sell short.

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When Is the Best Time to Look for a New Job?

The old adage follows that the best time to look for a job is when you already have one. While this may still hold true, the reality of today’s economic climate dictates that many excellent candidates are finding themselves unemployed and in the midst of a job search. There are pros and cons to both classifications of candidates – those who are employed and those who are not, when it comes to identifying your next career opportunity. What I have found over the years as a Recruiter is that no matter what your motivation for seeking a new opportunity, preparation and attitude are key.

As a Girl Scout Leader, our motto is “Be Prepared”! You should always have an updated resume with your current position ready to send out, even if you are not really looking. The chance that you have been waiting for to break into a new role may be a phone call away, and if the opportunity presents itself, you will need to move quickly. In addition to having your resume ready to go, be sure to have a current list of professional references. Ask for a letter of recommendation whenever you transition from one department, role or company to another. In cases where whole departments have been downsized or disbanded, be sure to stay in touch with managers and co-workers so that they are reachable when you need them. The current workforce is a very dynamic environment, so keep an updated list of references and contact information.

Timing in all phases of considering a new role will be critical. Candidates who are not currently employed will have an obvious advantage with schedule flexibility and availability when it comes to the interview process. Candidates who are employed will have to ask themselves if they are committed to the interview process, and prepared to take the time to interview prior to engaging in a search.

Generally speaking, considering a new role while you are gainfully employed will give you the opportunity to evaluate and compare your current situation with the new opportunity. If you are unemployed, it may be tempting to accept the first job offer that comes your way; however, you need to think like a candidate who is employed so that you don’t end up in the wrong role. Ask yourself the same questions an employed candidate would consider. Will your skills be best utilized in this role? Will your one, five, and ten-year goals be met by joining this organization? Are you staying on track with your compensation history and goals? In the long run, taking the time to honestly evaluate an opportunity will benefit you both financially and career-wise.

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