The evolution of securities lending: Toward a more direct and transparent market
22 June 2026
Marty Tell, president and co-founder of Novellus, considers how regulatory capital pressures, evolving collateral structures, and emerging principal-to-principal models are driving a shift toward more direct, transparent, and capital-efficient securities lending markets
Image: Marty Tell
After more than 35 years in securities lending, including over two decades at Morgan Stanley and nearly a decade at State Street, one thing has become increasingly clear to me: the market we helped build is about to change dramatically.
For decades, securities lending has operated through a relatively stable framework. Beneficial owners 鈥� including pension funds, sovereign wealth funds, insurance companies, endowments, and asset managers 鈥� lend securities through agent lenders, typically large custodian banks. Borrowers, most commonly hedge funds and other institutional investors, borrow securities through prime brokers.
This intermediary-driven structure has helped build the modern securities lending ecosystem. It provides operational scale, risk management infrastructure, credit intermediation, and market access for a broad range of participants.
But I believe that longstanding structure is now facing pressure to change. And frankly, that is a good thing because as the saying goes, where progress ends, decay begins. Looking ahead, the securities lending market is being pushed to a new phase: one that is more direct, more transparent, and increasingly less dependent on balance sheet-intensive intermediaries. Here is why.
Regulatory capital and the friction of intermediation
Regulatory capital requirements are a key force reshaping how securities lending markets operate today.
Following the global financial crisis, banks and broker-dealers became subject to significantly higher capital requirements under frameworks such as Basel III. While these reforms have achieved their intended purpose of improving resilience in the financial system, they have also made balance sheet usage considerably more expensive for intermediaries involved in securities financing transactions.
In practice, this means that many transactions are structured in ways that minimise regulatory capital consumption rather than reflecting the underlying economics of the transaction. This dynamic is especially visible in the choice and treatment of collateral.
Under current frameworks, equity-for-equity transactions can carry materially higher risk-weighted asset (RWA) charges for intermediaries, often roughly double those of transactions collateralised by cash. As a result, when these trades are facilitated on intermediary balance sheets, the associated capital burden increases significantly.
Along with a more restrictive regulatory environment, this helps explain why non-cash collateral structures have historically seen more limited adoption in the US.
Recent regulatory developments may begin to shift this dynamic.
These constraints are most visible during balance sheet-sensitive periods, such as quarter-end and year-end, when intermediaries may reduce activity or reallocate exposures to manage capital.
As a result, regulatory frictions are prompting a broader re-evaluation of the securities lending ecosystem, especially as non-cash collateral structures are expected to gain broader adoption.
The evolving role of collateral
Historically, the US securities lending market has long been dominated by cash collateral. In this structure, borrowers post cash to secure borrowed securities, and agent lenders reinvest that cash to generate incremental returns.
However, cash collateral introduces additional complexity and risk.
While agent lenders generally indemnify beneficial owners against borrower default, they typically do not indemnify beneficial owners against losses arising from the reinvestment of cash collateral. As a result, beneficial owners remain exposed to reinvestment risk, even in programmes that provide default protection.
Outside the US, the securities lending market operates quite differently. In many international markets, where regulatory restrictions on non-cash collateral are less pronounced, non-cash collateral makes up approximately 70鈥�90 per cent of transactions, with the majority of that collateral consisting of equities, according to a report from the International Securities Lending Association (ISLA).
Using equities as collateral removes the reinvestment layer entirely. Instead of reinvesting cash into external instruments, collateral remains invested in securities and is typically held in segregated accounts through triparty custody arrangements. These arrangements allow collateral to be valued continuously and margined dynamically.
In the US, regulatory frameworks such as Securities and Exchange Commission (SEC) Rule 15c3-3 have historically limited the use of equity collateral by broker-dealers. However, recent regulatory developments, including new SEC guidance permitting the use of diversified equity baskets as collateral, mark a significant step toward broader adoption.
With this increased regulatory clarity, the use of equities as collateral in the US is expected to expand meaningfully, bringing the market closer to international practices.
A shift in market structure and potential impact on economics
Changes in collateral structures are likely to have a meaningful impact on the economics of securities lending.
Historically, cash collateral programmes have generated incremental revenue through reinvestment spreads. For general collateral (GC) equities, cash reinvestment income can account for approximately 20鈥�25 per cent of total lending revenue, based on the interpretation of data provided by Finadium.
As non-cash collateral, particularly equities, becomes more widely adopted, this reinvestment-driven revenue component will likely decline.
At the same time, the transition to equity collateral introduces new financial challenges for intermediaries. As noted earlier, equity-for-equity transactions can carry significantly higher RWA charges, often roughly double those associated with cash-collateralised trades.
This creates a challenging dynamic for intermediaries: declining reinvestment income alongside increasing capital requirements. This combination makes many transactions less attractive from a return-on-capital perspective.
As a result, intermediaries may be forced to increase spreads and margin charges to end users, reduce services such as indemnification or participation in certain types of transactions altogether.
Additionally, a decline in cash collateral would reduce the size of reinvestment pools, potentially increasing volatility and exposing participants to greater reinvestment risk.
Taken together, these pressures point to a fundamental shift in securities lending economics, particularly in the US.
Principal-to-principal lending: An emerging alternative
In response to these structural pressures, the market is increasingly exploring more direct models of interaction. While still evolving, this shift is already visible in a range of industry initiatives aimed at reducing reliance on intermediary balance sheets.
Efforts such as those led by the Global Peer Financing Association (GPFA), along with earlier agent-led direct lending programmes, reflect a broader trend toward more direct interaction between market participants.
In this model, end users in the securities lending market engage with one another rather than relying on intermediaries to connect supply and demand. Transaction terms, including pricing, collateral type, and margin levels, are negotiated between counterparties.
By reducing reliance on intermediary balance sheets, principal-to-principal transactions can help mitigate the regulatory capital constraints that influence the traditional model, particularly those associated with higher RWA charges on non-cash collateral.
They can also improve the economic distribution of securities lending. Under conventional programmes, a portion of the spread in lending transactions is retained by intermediaries managing the trade. In a principal-to-principal structure, more of the transaction鈥檚 economics remain with the beneficial owner and the borrower.
Another advantage of more direct models is increased transparency. In traditional securities lending programmes, beneficial owners often have limited visibility into demand for their securities, while borrowers may not have a complete view of available supply. More direct interaction provides clearer insight into pricing, demand, and market dynamics, supporting more efficient markets and better-informed decision-making.
While this is an emerging model, the objective is not to replace existing infrastructure, but to complement it 鈥� creating a more flexible ecosystem where direct engagement improves efficiency, enhances transparency, and gives market participants greater control. It may not apply to every transaction or participant, but expanding the range of available structures is a key driver of innovation.
Securities lending reimagined: The Novellus approach
At Novellus, we view these developments as part of a broader shift in how securities lending markets operate. As balance sheet constraints become more binding and market participants seek greater control and transparency, more direct models of interaction are becoming increasingly important to market evolution. Recent regulatory developments further reinforce this shift, reducing key barriers to the use of equity collateral and accelerating the move toward more capital-efficient structures.
By removing the need for balance sheet intermediation, capital constraints no longer need to shape how transactions are structured, allowing more efficient equity-for-equity lending.
Our platform enables beneficial owners and hedge funds to transact directly within a principal-to-principal framework, with transactions supported by non-cash collateral held in triparty custody arrangements.
Beyond facilitating bilateral transactions, Novellus provides a fully cloud-native software-as-a-service (SaaS) platform supporting pre-trade, trade negotiation, and post-trade workflows, enabling market participants to in-source securities lending operations with greater control and efficiency.
Within this framework, end users can negotiate terms that reflect the underlying economics and risk profile of the transaction, rather than the regulatory capital requirements of intermediaries.
As a result, more of the value generated in securities lending remains with the end participants, while also providing greater visibility into pricing and market demand.
This new framework benefits more than just the end users. Intermediaries can move lower-return, capital-intensive transactions off their balance sheets, enabling more efficient capital allocation and a greater focus on higher-return activities.
The objective is not to replace existing infrastructure, but to create a more flexible ecosystem where direct engagement improves efficiency, enhances transparency, and restores greater control to market participants.
The next phase of securities lending
Securities lending has long played an essential role in global financial markets. It supports liquidity, facilitates short selling, and contributes to efficient price discovery.
That will remain true, but the way of doing so is evolving. Regulatory capital is reshaping intermediation. Collateral structures are being re-evaluated. Technology is modernising market infrastructure and adding greater efficiencies. Market participants are also seeking greater transparency and control over their lending activities. Taken together, these forces point toward a more direct and transparent market, increasingly aligned with its end users.
The traditional intermediary-driven model will continue to play an important role. But alongside it, new structures are emerging that allow beneficial owners and borrowers to engage more directly with one another.
As these changes unfold, those who adapt to these structural shifts will be best positioned to shape what comes next.
For decades, securities lending has operated through a relatively stable framework. Beneficial owners 鈥� including pension funds, sovereign wealth funds, insurance companies, endowments, and asset managers 鈥� lend securities through agent lenders, typically large custodian banks. Borrowers, most commonly hedge funds and other institutional investors, borrow securities through prime brokers.
This intermediary-driven structure has helped build the modern securities lending ecosystem. It provides operational scale, risk management infrastructure, credit intermediation, and market access for a broad range of participants.
But I believe that longstanding structure is now facing pressure to change. And frankly, that is a good thing because as the saying goes, where progress ends, decay begins. Looking ahead, the securities lending market is being pushed to a new phase: one that is more direct, more transparent, and increasingly less dependent on balance sheet-intensive intermediaries. Here is why.
Regulatory capital and the friction of intermediation
Regulatory capital requirements are a key force reshaping how securities lending markets operate today.
Following the global financial crisis, banks and broker-dealers became subject to significantly higher capital requirements under frameworks such as Basel III. While these reforms have achieved their intended purpose of improving resilience in the financial system, they have also made balance sheet usage considerably more expensive for intermediaries involved in securities financing transactions.
In practice, this means that many transactions are structured in ways that minimise regulatory capital consumption rather than reflecting the underlying economics of the transaction. This dynamic is especially visible in the choice and treatment of collateral.
Under current frameworks, equity-for-equity transactions can carry materially higher risk-weighted asset (RWA) charges for intermediaries, often roughly double those of transactions collateralised by cash. As a result, when these trades are facilitated on intermediary balance sheets, the associated capital burden increases significantly.
Along with a more restrictive regulatory environment, this helps explain why non-cash collateral structures have historically seen more limited adoption in the US.
Recent regulatory developments may begin to shift this dynamic.
These constraints are most visible during balance sheet-sensitive periods, such as quarter-end and year-end, when intermediaries may reduce activity or reallocate exposures to manage capital.
As a result, regulatory frictions are prompting a broader re-evaluation of the securities lending ecosystem, especially as non-cash collateral structures are expected to gain broader adoption.
The evolving role of collateral
Historically, the US securities lending market has long been dominated by cash collateral. In this structure, borrowers post cash to secure borrowed securities, and agent lenders reinvest that cash to generate incremental returns.
However, cash collateral introduces additional complexity and risk.
While agent lenders generally indemnify beneficial owners against borrower default, they typically do not indemnify beneficial owners against losses arising from the reinvestment of cash collateral. As a result, beneficial owners remain exposed to reinvestment risk, even in programmes that provide default protection.
Outside the US, the securities lending market operates quite differently. In many international markets, where regulatory restrictions on non-cash collateral are less pronounced, non-cash collateral makes up approximately 70鈥�90 per cent of transactions, with the majority of that collateral consisting of equities, according to a report from the International Securities Lending Association (ISLA).
Using equities as collateral removes the reinvestment layer entirely. Instead of reinvesting cash into external instruments, collateral remains invested in securities and is typically held in segregated accounts through triparty custody arrangements. These arrangements allow collateral to be valued continuously and margined dynamically.
In the US, regulatory frameworks such as Securities and Exchange Commission (SEC) Rule 15c3-3 have historically limited the use of equity collateral by broker-dealers. However, recent regulatory developments, including new SEC guidance permitting the use of diversified equity baskets as collateral, mark a significant step toward broader adoption.
With this increased regulatory clarity, the use of equities as collateral in the US is expected to expand meaningfully, bringing the market closer to international practices.
A shift in market structure and potential impact on economics
Changes in collateral structures are likely to have a meaningful impact on the economics of securities lending.
Historically, cash collateral programmes have generated incremental revenue through reinvestment spreads. For general collateral (GC) equities, cash reinvestment income can account for approximately 20鈥�25 per cent of total lending revenue, based on the interpretation of data provided by Finadium.
As non-cash collateral, particularly equities, becomes more widely adopted, this reinvestment-driven revenue component will likely decline.
At the same time, the transition to equity collateral introduces new financial challenges for intermediaries. As noted earlier, equity-for-equity transactions can carry significantly higher RWA charges, often roughly double those associated with cash-collateralised trades.
This creates a challenging dynamic for intermediaries: declining reinvestment income alongside increasing capital requirements. This combination makes many transactions less attractive from a return-on-capital perspective.
As a result, intermediaries may be forced to increase spreads and margin charges to end users, reduce services such as indemnification or participation in certain types of transactions altogether.
Additionally, a decline in cash collateral would reduce the size of reinvestment pools, potentially increasing volatility and exposing participants to greater reinvestment risk.
Taken together, these pressures point to a fundamental shift in securities lending economics, particularly in the US.
Principal-to-principal lending: An emerging alternative
In response to these structural pressures, the market is increasingly exploring more direct models of interaction. While still evolving, this shift is already visible in a range of industry initiatives aimed at reducing reliance on intermediary balance sheets.
Efforts such as those led by the Global Peer Financing Association (GPFA), along with earlier agent-led direct lending programmes, reflect a broader trend toward more direct interaction between market participants.
In this model, end users in the securities lending market engage with one another rather than relying on intermediaries to connect supply and demand. Transaction terms, including pricing, collateral type, and margin levels, are negotiated between counterparties.
By reducing reliance on intermediary balance sheets, principal-to-principal transactions can help mitigate the regulatory capital constraints that influence the traditional model, particularly those associated with higher RWA charges on non-cash collateral.
They can also improve the economic distribution of securities lending. Under conventional programmes, a portion of the spread in lending transactions is retained by intermediaries managing the trade. In a principal-to-principal structure, more of the transaction鈥檚 economics remain with the beneficial owner and the borrower.
Another advantage of more direct models is increased transparency. In traditional securities lending programmes, beneficial owners often have limited visibility into demand for their securities, while borrowers may not have a complete view of available supply. More direct interaction provides clearer insight into pricing, demand, and market dynamics, supporting more efficient markets and better-informed decision-making.
While this is an emerging model, the objective is not to replace existing infrastructure, but to complement it 鈥� creating a more flexible ecosystem where direct engagement improves efficiency, enhances transparency, and gives market participants greater control. It may not apply to every transaction or participant, but expanding the range of available structures is a key driver of innovation.
Securities lending reimagined: The Novellus approach
At Novellus, we view these developments as part of a broader shift in how securities lending markets operate. As balance sheet constraints become more binding and market participants seek greater control and transparency, more direct models of interaction are becoming increasingly important to market evolution. Recent regulatory developments further reinforce this shift, reducing key barriers to the use of equity collateral and accelerating the move toward more capital-efficient structures.
By removing the need for balance sheet intermediation, capital constraints no longer need to shape how transactions are structured, allowing more efficient equity-for-equity lending.
Our platform enables beneficial owners and hedge funds to transact directly within a principal-to-principal framework, with transactions supported by non-cash collateral held in triparty custody arrangements.
Beyond facilitating bilateral transactions, Novellus provides a fully cloud-native software-as-a-service (SaaS) platform supporting pre-trade, trade negotiation, and post-trade workflows, enabling market participants to in-source securities lending operations with greater control and efficiency.
Within this framework, end users can negotiate terms that reflect the underlying economics and risk profile of the transaction, rather than the regulatory capital requirements of intermediaries.
As a result, more of the value generated in securities lending remains with the end participants, while also providing greater visibility into pricing and market demand.
This new framework benefits more than just the end users. Intermediaries can move lower-return, capital-intensive transactions off their balance sheets, enabling more efficient capital allocation and a greater focus on higher-return activities.
The objective is not to replace existing infrastructure, but to create a more flexible ecosystem where direct engagement improves efficiency, enhances transparency, and restores greater control to market participants.
The next phase of securities lending
Securities lending has long played an essential role in global financial markets. It supports liquidity, facilitates short selling, and contributes to efficient price discovery.
That will remain true, but the way of doing so is evolving. Regulatory capital is reshaping intermediation. Collateral structures are being re-evaluated. Technology is modernising market infrastructure and adding greater efficiencies. Market participants are also seeking greater transparency and control over their lending activities. Taken together, these forces point toward a more direct and transparent market, increasingly aligned with its end users.
The traditional intermediary-driven model will continue to play an important role. But alongside it, new structures are emerging that allow beneficial owners and borrowers to engage more directly with one another.
As these changes unfold, those who adapt to these structural shifts will be best positioned to shape what comes next.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities 麻豆影视传媒 Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities 麻豆影视传媒 Times
