The Pricing Implications of the Oligopolistic Securities Lending Market: A Beneficial Owner Perspective

56 Pages Posted: 17 Jul 2018

See all articles by Zsuzsa R. Huszar

Zsuzsa R. Huszar

National University of Singapore ; Central European University; Singapore Management University

Zorka Simon

Leibniz Institute for Financial Research SAFE

Date Written: June 15, 2018

Abstract

In the last decade, central bank interventions, flights to safety, and the shift in derivatives clearing resulted in exceptionally high demand for high quality liquid assets, such as German treasuries, in the securities lending market besides the traditional repo market activities. Despite the high demand, the realizable securities lending income has remained economically negligible for most beneficial owners. We provide empirical evidence of pricing inefficiencies in the non-transparent, oligopolistic securities lending market for German treasuries from 2006 to 2015. Consistent with Duffie, Gârleanu and Pedersen (2005)’s theory, we find that the less connected market participants’ interests are underrepresented, evident in the longer maturity segment, where lenders are more likely to be conservative passive investors, such as pension funds and insurance firms. The low price elasticity in this segment hinders these beneficial owners to fully capitalize on the additional income from securities lending, giving rise to important negative welfare implications.

JEL Classification: G12, G18, G21, G23

Suggested Citation

Huszar, Zsuzsa R. and Simon, Zorka, The Pricing Implications of the Oligopolistic Securities Lending Market: A Beneficial Owner Perspective (June 15, 2018). SAFE Working Paper No. 215, Available at SSRN: https://ssrn.com/abstract=3203304 or http://dx.doi.org/10.2139/ssrn.3203304

Zsuzsa R. Huszar

National University of Singapore ( email )

Business School
15 Kent Ridge Drive
Singapore, 117592
Singapore
+65 6516 8017 (Phone)
+65 6779 2083 (Fax)

Central European University ( email )

Nador utca 9
Budapest, H-1051
Hungary

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Zorka Simon (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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