MUFG Investor Services recently introduced agency securities lending services for the SBI V S&P500 Index Fund, managed by SBI Asset Management Co., Ltd., through the firm’s Global Securities Lending Solutions (GSLS). We spoke with Tim Smollen, EVP and Global Head of the GSLS team, who described the details and significance of this new offering.

Q: Is it unusual to provide this type of service in the Japanese market?

Tim Smollen (TS): This launch is a significant achievement and we’re very excited to provide a fully-fledged global agency securities lending service for a Japanese trust fund (domestic investment trust).  While securities lending transactions have been widely used by overseas investment trusts, Japanese investment trusts have only used securities lending in a very limited capacity. Securities lending itself is a common practice in other jurisdictions, as institutional investors, pensions, trust funds lend their assets to other market participants to generate additional revenue from their holdings.

Q: What prompted the decision to offer securities lending?

TS: We have been working on this for several years. In 2020, MUFG Investor Services decided to enhance our global securities lending capabilities by assembling a new team and investing in new technology. We have been involved in securities lending for more than two decades, but previously focused on regional programs with basic features. Recognizing a growing need in our industry, the GSLS team completely recast our offering by introducing more capabilities for clients, including diverse trade types, collateral options, and indemnification.

After enhancing our capabilities, our team met with many clients and SBI Asset Management in Japan expressed great interest in our new securities lending opportunities. We’ll serve as a lending agent for SBI and will lend securities, receive collateral, and initiate mark-to-market collateral value daily, based on their instructions. And we will ensure proper risk control—receiving 100% or more collateral of securities on loan, mark-to-market collateral value on daily basis, and request additional margin if collateral value is insufficient.

Q: What is the potential for this service and why is it important to your clients?

TS: We believe this is a very significant tool. It empowers asset management firms that cannot provide their own securities lending services and gives them the opportunity to generate additional revenue for funds and investors. In many ways, this service levels the playing field by giving those asset managers the same options as other investors who have long participated in securities lending. We’re very pleased that we developed a service that can help our client generate new revenue, and we intend to expand the service to other Japan-domiciled investment trust funds in the future.

Q: What were some of the factors that have hindered investment trusts from participating in securities lending in the past?

TS:  Historically, it’s been very difficult for Japanese investment trusts to do securities lending. It required significant technology upgrades as well as additional resources to operate a program.  Also, Japanese investment trusts didn’t use agent lenders because there are many regulatory points to consider when hiring an external lender. Our GSLS team worked with our clients, along with legal and regulatory experts, to clear those hurdles and create this opportunity.

Q: What are some of the other benefits of this service?

TS:  The needs of every client are different so it’s difficult to identify any specific thing. But I can say that SBI Asset Management, and all the clients that use our securities lending offering, will receive world-class service. Our clients benefit from the firm’s global reach, size, and expertise. And we prioritize risk management, risk mitigation, and accurate reporting, which are especially crucial for our Japanese clients.

Q:  What does this new offering mean to MUFG Investor Services?

TS:  This is another important step in the evolution of MUFG Investor Services. During the past decade, we have invested significantly to expand our global suite of services. MUFG Investor Services recently topped more than $1 trillion in assets under administration. Because we are a division of MUFG Bank, one of the world’s largest, we offer clients access to an extraordinary suite of products, including banking, fund finance, FX overlay, custody, and now securities lending. This means we have the unique ability to support our clients across the entire investment value chain.