Fidelity opens securities lending platform to all comers

Fidelity opens securities lending platform to all comers
The agency lending platform joins a compact group of less than a dozen companies that enable funds to lend securities to be sold short.
APR 28, 2021

After two years of field testing a securities lending platform on its own funds, Fidelity Investments is opening the platform to the broader universe of mutual funds, ETFs and institutional investors looking to add performance by lending securities to be sold short.

Fidelity Agency Lending, which is currently responsible for $2 trillion in assets, joins a compact group of less than a dozen companies that offer securities lending services to asset managers.

While the $10.3 trillion asset management conglomerate has had a securities lending division for more than two decades, the new platform enables Fidelity to compete with the likes of State Street and Goldman Sachs by helping asset managers earn money by lending securities to short-sellers. The platform provides AI loan decision functionality, benchmarking and transparency tools, and the ability to set custom parameters for lending programs in an automated fashion.

The securities lending market has been relatively steady over the past few decades, generating between $8 billion and $10 billion annually, 90% of which typically goes to the fund and 10% of which goes to the lending platform.

“Mutual fund managers can earn a few basis points of performance by lending out shares to be used for short selling by other investors,” said Todd Rosenbluth, director of mutual fund and ETF research at CFRA.

“This is a relatively common practice for ETFs, which are competing for investor attention and often generating stronger relative performance,” Rosenbluth said. “For mutual funds that invest with a low turnover approach, this is an opportunity to earn some income on shares that likely will not be sold for months.”

Most funds allow securities lending in their prospectus, and it can generate about 25 basis points worth of performance, said Justin Aldridge, head of Fidelity’s securities lending platform.

“Current market dynamics are compelling institutions to take a more active role in their securities lending programs to find a competitive advantage,” Aldridge said in a statement. “We believe firms are looking for an agent lender with both new technology and the proven ability to serve large, complex institutions, and we’re excited to offer that to the marketplace.”

The risk for investors in mutual funds and ETFs that lend securities largely depends on how the agency lender manages the assets from the lending program.

“While we take a conservative approach to securities lending, we’re proud that our lending program could meaningfully improve the overall returns that we deliver to our fund shareholders,” David Lane, head of global equity trading for Fidelity’s Asset Management division, said in the statement.

“Our teams have benefitted from the investments Fidelity Agency Lending has made in its technology, people and operations,” Lane said. “And ultimately, they have benefitted our shareholders as well.”

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