Securities Lending Strategies: Exclusive Valuations and Auction Bids

TL;DR

This paper develops valuation methods for securities lending portfolios, introduces a faster converging weighting scheme, and explores auction strategies through simulations for different market participants.

Contribution

It presents a novel weighting scheme that converges faster to true valuations and applies it to securities lending auctions and bidding strategies.

Findings

The new weighting scheme outperforms minimum variance in convergence speed.

Valuations can inform bidding strategies in exclusive securities lending auctions.

Simulations demonstrate the effectiveness of the proposed valuation and bidding methods.

Abstract

We derive valuations of a portfolio of financial instruments from a securities lending perspective, under different assumptions, and show a weighting scheme that converges to the true valuation. We illustrate conditions under which our alternative weighting scheme converges faster to the true valuation when compared to the minimum variance weighting. This weighting scheme is applicable in any situation where multiple forecasts are made and we need a methodology to combine them. Our valuations can be useful either to derive a bidding strategy for an exclusive auction or to design an appropriate auction mechanism, depending on which side of the fence a participant sits (whether the interest is to procure the rights to use a portfolio for making stock loans such as for a lending desk, or, to obtain additional revenue from a portfolio such as from the point of view of a long only asset management firm). Lastly, we run simulations to establish numerical examples for the set of valuations and for various bidding strategies corresponding to different auction settings.