SECURITISED LENDING

FPCT specialises in Securitised Lending consultancy and training. Our experienced team ensures compliant products and offers ongoing support. We cover various financial areas like capital markets, derivatives, and structured finance.

Securitised financial products are investment instruments created by pooling financial assets (like loans, mortgages, or receivables) and converting them into tradable securities. These securities represent ownership in the underlying assets, offering investors diversified exposure. The process involves packaging assets into a special purpose vehicle (SPV) and issuing securities backed by the cash flows from the assets. Securitised products vary in complexity, risk, and returns, with unique features and market dynamics. Investors have different risk appetites and objectives, making these products suitable for various purposes. However, they carry different levels of complexity and risk, requiring careful assessment, due diligence, and professional advice before investing. Contact us for industry-leading advice and training on securities lending and more.

SECURITISED LENDING ATTRIBUTES

These attributes collectively make securities lending products an essential component of financial markets, providing liquidity, facilitating short selling and hedging activities, and generating additional income for institutional investors. It is crucial for market participants to carefully assess the risks and rewards associated with securities lending and adhere to best practices and industry regulations. The eight main attributes or characteristics of securities lending products:

Collateralised Lending

Securities lending involves the temporary lending of securities by institutional investors to other market participants. The lending is typically collateralised, meaning the borrower provides collateral, such as cash or other securities, to the lender as security against the borrowed securities.

Short-Term Nature

Securities lending transactions are typically short-term in nature, with agreed-upon terms and a specific duration. The lending period can range from a few days to several months, depending on the needs of the parties involved.

Fee-Based Transactions

Securities lending is a fee-based service, where the lender receives compensation in the form of lending fees from the borrower. The fee is typically calculated based on factors such as the value and type of securities lent, the duration of the loan, and prevailing market conditions.

Customisable Loan Terms

Securities lending transactions offer flexibility in structuring the loan terms. Parties involved can negotiate parameters such as the collateral type, interest rate, and additional terms and conditions to meet their specific requirements.

Risk Mitigation through Collateralisation

Collateralisation of securities lending transactions helps mitigate the credit risk associated with lending securities. The borrower provides collateral that exceeds the value of the borrowed securities, ensuring the lender has a sufficient buffer in case of default.

Use in Short Selling and Hedging

Securities lending enables short selling and hedging for borrowers like hedge funds and broker-dealers, who borrow securities to sell in the market and profit from price declines. Institutional investors lend securities to earn fees and optimize their portfolio returns.

Counterparty Risk Management

Securities lending involves managing counterparty risk, as the lender needs to ensure the borrower is creditworthy and capable of returning the borrowed securities. Robust due diligence and collateral management processes are in place to mitigate potential risks.

Market Liquidity Enhancement

Securities lending contributes to market liquidity by increasing the availability of securities for trading. It allows market participants, such as market makers or short sellers, to access securities they need for various trading strategies, promoting efficient price discovery and overall market functioning.

SECURITISED LENDING TYPES

These securitised financial products serve different purposes and offer investors a range of risk and return profiles. However, it's important to note that they can carry varying degrees of complexity and risk. Investors should carefully assess their risk tolerance, conduct thorough due diligence, and seek professional advice before investing in these instruments.

Mortgage-Backed Securities (MBS)

Mortgage-backed securities are created by pooling together a group of mortgages and selling them to investors. The cash flows from the mortgage payments are then passed through to the investors in the form of interest and principal payments. MBS can be backed by residential mortgages, commercial mortgages, or a combination of both.

Asset-Backed Securities (ABS)

Asset-backed securities are securities backed by a pool of diversified assets. These assets can include auto loans, credit card receivables, student loans, or other types of loans. ABS provide investors with exposure to the cash flows generated by the underlying assets, allowing for risk diversification.

Collateralised Debt Obligations (CDOs)

Collateralised debt obligations are structured financial products that pool together various types of debt instruments, such as bonds and loans. These instruments are then divided into different tranches with varying levels of risk and return. Investors in CDOs receive cash flows from the underlying debt instruments based on the tranches they hold.

Collateralised Loan Obligations (CLOs):

Collateralised loan obligations are similar to CDOs but specifically focus on loans, typically leveraged loans or other types of corporate debt. CLOs pool together a diversified portfolio of loans and issue different tranches of securities based on the credit quality and risk profile of the loans.

Repurchase Agreements (Repo)

Repurchase agreements, or repos, are short-term borrowing agreements. In a repo transaction, one party sells securities to another party with an agreement to repurchase them at a specified future date and price. Repos are commonly used by financial institutions and investors to raise short-term funds by using their securities as collateral.

Securities Lending

Securities lending involves the temporary lending of securities by institutional investors, such as mutual funds or pension funds, to other market participants, such as hedge funds or broker-dealers. The borrowers typically use the securities for short-selling or hedging strategies, and in return, the lenders receive a fee for the lending.

Sell/Buy-Back Agreements

Sell/buy-back agreements involve the sale of securities by one party to another party with an agreement to repurchase them at a predetermined price and date. These agreements provide short-term financing for market participants and are commonly used in the money markets.

Collateralised Mortgage Obligations (CMOs)

Collateralised mortgage obligations are mortgage-backed securities that divide the cash flows from the underlying mortgages into different classes or tranches. Each tranche has specific risk and return characteristics, allowing investors to choose the level of risk exposure they desire.

Synthetic CDOs

Synthetic collateralised debt obligations use credit derivatives, such as credit default swaps, to create exposure to underlying debt instruments without actual ownership. Synthetic CDOs are structured products that allow investors to take on credit risk and potentially earn returns based on the performance of the referenced debt securities.

Covered Bonds

Covered bonds are debt instruments issued by financial institutions and backed by a pool of high-quality assets, such as mortgages or public-sector loans. These bonds provide additional security to bondholders, as they have both the issuer's credit quality and the underlying assets as collateral.

Credit-Linked Notes (CLNs)

Credit-linked notes are debt securities whose value is linked to the credit performance of a reference entity or pool of assets. The performance of the CLN is typically tied to the occurrence of credit events, such as defaults or credit rating downgrades. Investors in CLNs receive interest payments based on the credit risk associated with the reference entity or assets.

Whole Business Securitisations

Whole business securitisations involve the securitisation of cash flows from an entire business, including its assets, liabilities, and ongoing revenue streams. These structures are commonly used in industries such as franchising, where the cash flows from multiple franchise locations are pooled together and securitised.

TRAINING ON SECURITIES LENDING

FPCT offers comprehensive training on Securities Lending, helping our clients understand the risks and rewards of this investment product. Our training covers topics such as the different types of securities lending, the mechanics of transactions, and best practices for successful implementation. We provide our clients with the up-to-date knowledge and expertise they need to make informed decisions.