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Over 85% of BlackRock clients’ defined contribution (DC) assets are in lending funds1 as plan sponsors seek to trim fees and boost return.
Today, with new regulations and greater transparency since the financial crisis, securities lending activity has reached record levels with approximately $36.8 trillion in assets available for lending globally.2 Many plan sponsors who did not participate in lending following the financial crisis are reexamining this longstanding practice as a way to unlock additional portfolio value for their participants.
What’s in it for participants?
Income generated through securities lending may help offset some investment management fees. Lower fees may help participants keep more of their investment return.
What’s in it for plan sponsors?
Reducing costs and fees through securities lending can unlock additional value from participant portfolios and may help plans meet their fiduciary obligation. BlackRock has a long-term track record of generating positive monthly lending income for every fund that has participated in securities lending since our program’s inception in 1981.
How does it work?
Our new guide offers more detail, but here are the basics of securities lending: a large financial institution borrows a security in exchange for collateral in excess of the security’s value. Acceptable collateral may include cash, an irrevocable letter of credit issued by a bank, or securities issued or guaranteed by the U.S. government. Cash is the most common form of collateral in the U.S. and may be reinvested in a short-term investment fund with the objective of preserving principal and liquidity while generating income.
What are the risks?
There are two primary risks in securities lending: the inability of a borrower to return the security and potential losses from the reinvested collateral.
What is BlackRock’s approach?
BlackRock’s securities lending program is integrated into the firm's global portfolio management functions including research, trading, technology and risk management. BlackRock’s stringent standards seek to protect clients even beyond newly tightened regulations by:
- Assessing borrower creditworthiness against highly conservative standards and engaging with only well-capitalized, high-quality institutions.
- Investing cash collateral in high-quality, short-term securities with the objective of preserving capital and liquidity while generating income.
Every element of our lending activity is executed as a fiduciary, in our clients’ best interest, and with prudent risk management. To learn more about what securities lending can do for your DC plan, download the guide below.
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1 BlackRock, December 31, 2021.
2 IHS Markit, December 31, 2021.
Past performance does not guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Any opinions expressed in this publication reflect our judgment at this date and are subject to change. No part of this publication may be reproduced in any manner without the prior written permission of BlackRock Institutional Trust Company, N.A., (“BTC”).
BTC, a national banking association operating as a limited purpose trust company, manages the collective investment products and services discussed in this publication and provides fiduciary and custody services to various institutional investors. Strategies maintained by BTC are not insured by the Federal Deposit Insurance Corporation or any other agency of the US government, are not an obligation or deposit of, or guaranteed by, BlackRock, Inc. or any of its affiliates. None of the information constitutes a recommendation by BTC or a solicitation of any offer to buy or sell any securities. The information is not intended to provide investment advice. Neither BTC, nor BlackRock, Inc. guarantees the suitability or potential value of any particular investment. The information contained herein may not be relied upon by you in evaluating the merits of investing in any investment.
These materials are being provided for informational purposes only and are not intended to constitute tax, legal or accounting advice. You should consult your own advisers on such matters. Additional information is available on request. Information contained herein is believed to be reliable but BlackRock does not warrant its accuracy or completeness. Information contained herein represents BlackRock’s own opinions. There can be no assurance that the investment objectives of any strategy referred to herein will be achieved. An investment in any strategy referred to herein involve a high degree of risk, including the risk that the entire amount invested may be lost.
Securities Lending Returns. BlackRock retains a portion of securities lending returns in exchange for managing the program. This fee reflects risk management, as well as the technology and personnel costs of maintaining the lending platform. In addition, BlackRock receives a fee for the management of cash collateral. Actual lending yields and fees for strategies represented may vary. Please note, other administrative costs, including but not limited to, accounting, custody and audit fees, may vary. Investors may receive 50% of securities lending returns and BlackRock retains 50%, except in cases where a client may negotiate a different compensation arrangement. BlackRock may negotiate different securities lending compensation arrangements with our clients depending on a variety of factors, including, but not limited to, the nature and size of the investment and the overall relationship with, and services delivered to, a particular client. Asset spread income is defined as the interest income earned in cash reinvestment funds on collateral balances less the Federal Funds Open Rate. Liability spread income is defined as the difference between the Federal Funds Open Rate and the rebate rate negotiated with the borrower.
Securities lending involves exposure to certain risks, including cash collateral investment risk (i.e., risk that cash collateral investments, whether in cash collateral funds or otherwise, may not achieve their investment objective, including suffering realized or unrealized loss due to investment performance), “gap” risk (i.e., risk that the return on cash collateral investments is insufficient to pay the rebate fees the lending fund or lending account has committed to pay to borrowers), liquidity risk (i.e., risk that the cash collateral is invested, directly or through the cash collateral funds, in securities and other instruments that are less liquid than the lending fund or lending account, which could limit the liquidity available to the lending fund or lending account for ordinary course transactions), operational risk (i.e., risk of losses resulting from problems in the settlement and accounting process), foreign exchange risk (i.e., risk of a shortfall at default when a cash collateral investment is denominated in a currency other than the currency of the assets being loaned due to movements in foreign exchange rates), and credit, legal, counterparty and market risks. At any particular point in time, investments in the cash collateral funds could comprise a material portion of a lending fund’s assets.
The information and opinions contained herein are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, but are not necessarily all inclusive and are not guaranteed as to accuracy or completeness. No part of this material may be reproduced, stored in any retrieval system or transmitted in any form or by any means, electronic, mechanical, recording or otherwise, without the prior written consent of BlackRock. This publication is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.
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