The Lemon Fool

I have a fund with HSBC Asset Management, who have written to inform me that they will commence securities lending activities. I assume for me this is largely risk free, given that HSBC say they will indemnify me against losses.
However, I was left wondering why they would be lending now, as the only reason I can see is to enable counterparties to go actively shorting stocks. Is this a sign they expect the market to fall?

Nimrod103 wrote:I have a fund with HSBC Asset Management, who have written to inform me that they will commence securities lending activities. I assume for me this is largely risk free, given that HSBC say they will indemnify me against losses.

However, I was left wondering why they would be lending now, as the only reason I can see is to enable counterparties to go actively shorting stocks. Is this a sign they expect the market to fall?

Securities lending is very safe not just because HSBC will underwrite any loss, but because the chances of such a loss are tiny. They are tiny because any lending is collateralised by hypothecating liquid securities, typically to 110% of the value of the loan, and marked to market.

Securities lending has been routinely going on since the 1990s, pretty much since we dematerialised holdings. Providers of index funds are particularly active in doing this since their holdings are very stable over time.

And yes, it exists primarily to facilitate shorting. I would not regard it as any sign of market weakness however. The higher the short interest, the more latent buy demand there can be in the market, since every short position must eventually be closed out. And since it is expensive to hold a short position (you pay to borrow and you have to fund the dividends), such positions usually are not held for long periods.

I would not worry about it either way.

Lootman wrote:I would not worry about it either way.

I wasn't worried, but I was wondering if it might be a leading indicator. AFAIAA none of my other funds have been lending.

Nimrod103 wrote:I have a fund with HSBC Asset Management, who have written to inform me that they will commence securities lending activities. I assume for me this is largely risk free, given that HSBC say they will indemnify me against losses.
However, I was left wondering why they would be lending now, as the only reason I can see is to enable counterparties to go actively shorting stocks. Is this a sign they expect the market to fall?

You could ask HSBC Asset Management what portion of the revenue from this activity is credited to the fund providing the securities? I know some asset management firms split it 50:50 (I think Ishares do as I recall).

As they have not mentioned it my guess is they are trousering all the revenue.

Hi Nimrod103.

I would take a look at this: https://www.interactivebrokers.com/en/pricing/stock-yield-enhancement-program.php

Different company and referring to US rules, but no doubt, HSBC and UK rules are similar. I would say the risk is quite low, but note the section

"The Securities Investor Protection Act of 1970 may not protect shares loaned out. This is why under SEC rules IBKR must provide you with U.S Treasury or cash collateral in the same amount as the value of your shares to protect you in the very unlikely event that the stock is not returned to you."

Hence, the risk you would be taking is a function of any collateral provided (unless HSBC themselves are underwriting it, in which case you have them as counterparty risk - once again, quite low I would have thought - but not zero).

Regards, Newroad

scrumpyjack wrote:

Nimrod103 wrote:I have a fund with HSBC Asset Management, who have written to inform me that they will commence securities lending activities. I assume for me this is largely risk free, given that HSBC say they will indemnify me against losses.
However, I was left wondering why they would be lending now, as the only reason I can see is to enable counterparties to go actively shorting stocks. Is this a sign they expect the market to fall?

You could ask HSBC Asset Management what portion of the revenue from this activity is credited to the fund providing the securities? I know some asset management firms split it 50:50 (I think Ishares do as I recall).

As they have not mentioned it my guess is they are trousering all the revenue.

After reading their letter more carefully, they say they are splitting the revenue 75/25 in favour of the funds, with the potential amount lent up to 29%, though they expect to lend only up to 25% of the fund value.

scrumpyjack wrote:You could ask HSBC Asset Management what portion of the revenue from this activity is credited to the fund providing the securities? I know some asset management firms split it 50:50 (I think Ishares do as I recall).

I think iShares standard split is 62.5% fund, 37.5% BlackRock.