Operational Management of Securities Lending

Why is operational risk so prevalent in securities lending?

Operational risk is particularly prevalent in securities lending due to the numerous life-cycle events that are involved, which can be complex and require significant management. These events may include the origination and structuring of loans, the negotiation of loan terms, the delivery and receipt of securities and collateral, and the management of events such as re-rates and manufactured payments. 

The management of these events can be challenging for lenders, particularly for those who lack the necessary infrastructure, leading to a greater likelihood of operational risk. As a result, many lenders outsource the processing of securities lending to third-party service providers who can offer expertise, automation, and economies of scale.

What role do third-party service providers offer in managing securities lending?

Third-party service providers play a crucial role in managing securities lending by offering various services that assist with different aspects of the lending process. These providers include trading platforms, market data aggregators, third-party post-trade process management agents, and tri-party collateral management agents. 

Trading platforms offer automated trading systems that assist with loan negotiation, while market data aggregators collect securities lending data and disseminate it to subscribers. 

Third-party service providers manage life-cycle events of loans, reconcile settlement instructions, and manage post-trade events such as billing borrowers for fees and issuing pre-advice for manufactured payments. They can also manage the loan itself, monitor returns and records, and take over certain regulatory tasks such as assisting with agency lending disclosure.