Non-bank financial institutions: assessment of their impact on the stability of the financial system



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Cross-cutting issues 
 
 
 
 
 
 
 
 
53 
 
Figure 26: Participants and relationships in securities lending 
Source: Dive et al. (2011) 
Dive et al. (2011) note that “
According to Data Explorers, revenue from securities lending peaked 
at $14.3 billion in 2008, falling to $6.5 billion in 2010. This represents a small proportion of 
beneficial owners’ total returns but for some beneficial owners, such as exchange-traded funds 
(ETFs), their securities lending activities can represent a significant proportion of their revenue. 
According to Deutsche Bank, securities lending may account for up to a third of ETF providers’ 
revenue
.” 
For an economic perspective, repurchase agreements (repos) are very similar to security lending. A 
repurchase agreement is the sale of a security coupled with an agreement to repurchase the 
security, at a specified price, at a later date. In both cases, title to a security is temporarily 
transferred to a third party (see Adrian et al. (2010) and Ruchin (2011) for further details on the 
functioning of the repo market).
However, they differ in the sense that repos have a fixed term. In contrast to securities lending 
where the transaction is typically driven by a borrower seeking temporary ownership of a security, 
repos are often driven by a lender seeking to obtain liquidity. 
More recently, a particular form of repos and securities lending has emerged, namely collateral 
upgrade transactions whereby the two parties to the transaction exchange assets of substantially 
different quality. The borrower receives the higher quality assets and, in return for which, posts 
collateral, while the lender provides the higher quality assets and, in return, receives poorer 
quality collateral (FSA, 2012). A particular form of such transactions are liquidity swaps “
which 
effect a liquidity transformation between an insurer (counterparty long liquidity) and a bank 
(counterparty short liquidity) by typically exchanging high-credit quality, liquid assets such as gilts 
held by the former with illiquid or less liquid assets, such as asset-backed securities (ABS) held by 
the latter
” (FSA, 2011). 



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