The changes by BlackRock Inc., Northern Trust Asset Management and State Street Global Advisors are the latest developments in the rapidly evolving securities lending industry.
Pension funds, foundations and endowments were stung by billions of dollars in investment losses from securities lending by their global custodians during the financial crisis. The firms had put the collateral they received from securities borrowers into subprime mortgages and other investments that collapsed.
New guidelines from asset owners normally require the collateral to be placed in more short-term and liquid money market and other investment options, investment consultants said. The consultants said money management firms have also instituted their own, more conservative guidelines.
Some pension funds — such as the $10.8 billion Chicago Public School Teachers' Pension & Retirement Fund — no longer allow their global custodians to handle securities lending. Instead, in search of lower fees, they have hired independent securities lending firms. The Chicago Teachers' fund now is using Deutsche Bank Group for securities lending, and BNY Asset Servicing as custodian. Northern Trust, which had served as custodian and securities lending agent, was terminated.
Other pension funds, including the $185.5 billion California State Teachers' Retirement System, West Sacramento, use multiple securities lending agents, part of an effort to lower costs and increase profits from securities lending.
Some have hired securities lending consultants to do reviews of programs and get better fees. Greg Kore, a principal and head of North American trust/custody and securities lending consulting at Mercer Inc., New York, said securities lending revenue splits have dropped since the financial crisis, with the custodian now taking as little as a 10% share, down from 60%.
