Fidelity Investments is cutting out its middleman -- Goldman Sachs Group Inc. -- when dealing with Wall Street short sellers.
The money manager is bringing its stock-lending business in-house, according to a March 29 regulatory filing, instead of paying Goldman Sachs to run it. According to filings, the bank received about 10% of the revenues generated by Fidelity’s lending, primarily to firms that borrow stocks to bet against them.
Fidelity, which managed $2.7 trillion of assets in March, plans to use some of the savings from the switch to boost returns in the funds that lend securities, particularly index trackers that hold thousands of different stocks. The move comes as Fidelity and its rivals compete to cut fees on index funds, luring assets that can be used for more profitable businesses like securities lending, industry analysts say.
“The lower fees go, the more important securities lending revenue becomes,” said Stephen Biggar, an Argus Research analyst who tracks financial services companies.
Securities finance is a big business, producing more than $9.9 billion of revenue globally for lenders last year, according to EquiLend, a securities-finance trading and clearing service owned by global financial firms.
Boosting Returns
Securities lending plays an essential role on Wall Street. Fund managers, pension plans and insurers -- some of the largest players in the market -- make their stocks and bonds available to those who want to sell short, avoid a settlement failure or capture an arbitrage opportunity. Hedge funds are a major source of demand.
The borrowers put up cash collateral, which typically exceeds the value of the securities, that lenders reinvest for the life of the loan. The investment gains can go both to the fund that lends the securities, lifting its return, and to the management firm, boosting its revenue, according to a December report by Morningstar Inc.
Fidelity’s stock funds mostly invest the cash collateral in a dedicated money market fund, making it a rough yardstick for their total securities lending. At the end of February, the Fidelity Securities Lending Cash Central Fund had net assets of about $18.8 billion.
Boston-based Fidelity’s goal in taking over securities lending is to provide “an even greater benefit” to shareholders, according to a statement from spokeswoman Nicole Abbott. The funds will collect at least 90.1% of the revenue from their lending compared with the 90% they got when Goldman was the broker, according to Fidelity.