Over the past several decades, securities lending has evolved into a vital component of the financial markets and an important benefit for fund investors.
Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.
Frequently asked questions
What is securities lending?
Securities lending is when funds make short-term loans of its assets (e.g. stocks or bonds) to incrementally increase returns for investors.
How does it work?
First, a large financial institution asks to temporarily borrow a stock or bond from a fund. In order to borrow the stock or bond, the financial company must pay a fee and provide collateral to the fund.
The fund keeps the collateral to secure repayment in case the borrower fails to return the loaned stock or bond. The value of the collateral must exceed the value of the loaned stock or bond, to provide the fund with a "safety cushion" to prevent loss if the borrower doesn't return the security.
How do fund investors benefit from securities lending?
Investors can benefit from securities lending in the form of better performance. How? The fund can generate additional income through the fee that it charges for lending securities. This has the equivalent effect of offsetting management fees.
How much do investors benefit from securities lending?
The performance contribution varies by fund and asset class.
BlackRock periodically benchmarks its securities lending performance versus competitors using data from independent third-party providers. Over three decades, BlackRock has focused on delivering competitive returns while balancing return, risk and cost.
Securities lending risk. There is the very slight risk of loss should the borrower go out of business before the securities are returned, and due to market movements the value of collateral held has fallen and/or the value of the securities on loan has risen.
How much securities lending proceeds are returned to investors in BlackRock funds domiciled in Europe?
Effective May 1st 2014 for funds domiciled in Luxembourg and Ireland and June 1st 2014 for funds domiciled in the United Kingdom, 62.5% of all securities lending revenues are paid directly into the fund, with BlackRock receiving 37.5% compensation which covers all operational costs.
We encourage investors to ask fund managers for detail on their securities lending programme, and most importantly, the net returns to investors. When some fund providers may report paying out a higher percentage of the net proceeds from securities lending, they may not clearly disclose the portion of the gross proceeds they pay to their lending agents. BlackRock believes the net returns to fund investors, balanced with appropriate risk and fee disclosure, is the best gauge of investor benefits from securities lending. With BlackRock, there are no hidden fees.
It is important to remember that some lenders are able to generate more return from a given basket of securities due to their scale, skill, or information advantage.
What makes BlackRock’s securities lending different?
We believe in managing our securities lending operations on our proprietary platforms, rather than outsourcing this important function to a third party as many other investment managers do. To that end, we have built a robust infrastructure so that every element of our lending activity is executed in our clients' best interest and with prudent risk management. Since 1981, BlackRock has delivered positive lending income for every fund that participates in securities lending.
Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.
