Wealth Management and Financing June 3, 2021

The Growth of Securities Lending Opportunities in the Private Sector

Traditional securities lending transactions originated within the limited universe of large investment banks that developed mechanisms to derive new revenue streams from their inventories of publicly traded securities. Direct lenders subsequently opened the industry to private investors through collateralized stock loans and related transactions that gave those investors to use the cash liquidity that had previously been locked into their portfolios. A recent partnership between Citi Ventures and the financial technology firm, Sharegain, has created additional opportunities for wealth management firms to participate in the industry.

In traditional securities lending, the holder of a large block of stock lends that stock to a borrower entity. The borrower delivers cash collateral to the lender and uses the stock to cover short positions and for other purposes until the transaction is unwound. Direct finance entities built on this model to create the collateralized stock loan industry, in which a private investor uses securities as collateral for a nonrecourse loan. Nonrecourse collateralized stock loans remove many of the multi-party complexities in traditional securities lending and, accordingly, are a more suitable investment strategy for private individuals.

The Citi Ventures partnership is a step toward bridging the gap between these two ends of the industry. It utilizes existing technology infrastructure to give wealth managers the opportunity to select stocks that they want to put into a lending environment and to review lending terms and conditions that might apply to those stocks. This is essentially the same protocol that had only been available to large institutions that have the size and scale to derive significant profits from securities lending. With the new partnership, smaller wealth management firms and other financial advisors would now have the same opportunity.

Citi Ventures expects to roll out this new opportunity on a limited basis in certain markets in Asia. The securities lending industry and its service providers have already established a strong foothold in most Asian countries. Citi Ventures’s choice to open its new offering in the Asian markets is likely a reflection of an already-strong foundation and the growing demand from investors in those markets for financial products and services that had previously been confined to the institutional market and the parallel growth of new investments and entrepreneurial corporate activity in those markets.

The technology partner, Sharegain, has stated that its collaboration with Citi Ventures reflects a potential to democratise securities lending. Sharegain previously launched a platform to support environmental, social, and corporate governance (ESG) factors by enabling investors to allocate a percentage of their lending liquidity to ESG initiatives.

Perhaps the most telling element of the Citi Ventures-Sharegain partnership is that the products and services are targeting wealth management firms. Many of those firms might have previously guided their clients away from securities lending and stock loans. The expansion of securities lending to include wealth managers is a reflection of how the industry has matured and become a mainstream component of more progressive wealth management strategies. Innovative investors will continue to look for opportunities to derive value from their portfolios, and the growth of securities lending opportunities in the private sector will continue to serve that desire.