The role of securities lending in well-functioning markets

Securities lending is an important contributor to well-functioning markets. Surprisingly, this market remains under-studied particularly from the perspective of industry practitioners. In our latest Asset Manager Perspective note, we aim to bridge the gap by drawing on our own research and experiences, and referencing relevant academic literature.

Our key argument in the note is that an asset owner’s securities lending activities are the result of an interplay between three separate objectives – contributing to well-functioning markets, generating income from the portfolio inventory, and maintaining the relationship with companies and exercising voting rights.

In the note, we first analyse how securities lending markets help in price discovery. We then consider the incentive structures and risks for stock borrowers, and highlight the important role that regulatory policy plays in that incentive structure. We conclude with a discussion of our approach to managing the lender’s separate objectives.

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the Asset Manager Perspective series

The Asset Manager Perspective series articulates Norges Bank Investment Management’s views and reflections on issues topical for the financial industry. They are not meant to be definitive, rather they are intended as timely contributions for the benefit of all market participants. The series is written by employees, and is informed by our investment research and our experience as a large, long-term asset manager.