Trails of bright light and sparks trapped in clear box

From boom to bust: considerations for the securities lending industry

Authors

  • Mark Nichols

    Principal, Capital Markets Strategy and Business Transformation, Ernst & Young LLP

  • Brendan Maher

    Managing Director, Financial Services Consulting, Ernst & Young LLP

  • Seha Islam

    Senior Manager, Financial Services Risk Management, Ernst & Young LLP

06 minute read 28 Apr 2025

The future of securities lending: disruption, transformation, and survival in the digital age.

In brief
  • Distributed ledger technology (DLT) and tokenization have the potential to significantly disrupt securities lending markets.
  • Disruption is already underway in the form of new assets, new infrastructure and new participants challenging incumbents.
  • These technological shifts can also accelerate securities markets’ existing initiatives to longer trading days and faster settlement.

Disruption of incumbents has accelerated in recent decades as a secular trend across all sectors of the economy. This trend is evident in the average tenure of companies in the S&P 500 Index. The average lifespan of a US S&P 500 company used to be 67 years. Now it’s 15 and expected to shorten further.¹ Additionally, information technology companies in 1969 made up a small portion of the S&P 500, only 16 firms, but now tech firms dominate the sector. This shift portends even more disruption in the future as artificial intelligence (AI), blockchain and quantum computing have the potential to remake markets and reshape operating models. For financial markets, we are now at a crossroads where liquidity can move at the speed of light and protocols can offer alternatives to traditional intermediaries  to instantaneously clear transactions. At this pivotal moment, the recent advancements in the adoption of DLT and tokenization poses opportunities and threats for securities lending market participants. We recently collaborated with the International Securities Lending Association (ISLA) Americas to analyze DLT and tokenization trends in securities lending markets and published this article to advance the discussion of continued adoption. The developments we observed indicate that the securities lending space is poised for transformation from DLT and tokenization opening the door for incumbents to re-evaluate strategies to incorporate this new technology into their approach and products.


Why now? 

The securities markets have undergone notable phases, transitioning from manual processes in the 1990s to automated lender databases in the 2000s. The 2010s saw the introduction of automation and central counterparties, marking a shift toward greater efficiency. DLT adoption is expected to significantly reshape the market structure of the securities lending industry going forward, paving the way for new entrants and innovation. 

A variety of factors contribute to the current landscape, often described as a “perfect storm” for disruption. Key drivers include clearer legislative and regulatory frameworks, accelerating technological adoption, an influx of new markets and competitors and the recognition by incumbents of the risks associated with delayed transformation. These factors highlight the need to define a strategy to seize opportunities and maintain market share.

What’s different?

The future securities lending market may bring near real-time settlement, automated collateral management and a variety of new players, counterparties and assets. 


What’s at risk?

There can be risks associated with this transformation. Disruptive challengers and changing market structures threaten to erode roles and revenue streams of existing intermediaries.

What’s possible?

Tokenized assets, fractional ownership, 24/7 markets and automated corporate actions are just the tip of the iceberg of disruption possibilities.

Innovations such as digital-native securities and the tokenization of real-world assets could revolutionize how lending and margin pools operate. Moreover, advancements that enable 24/7 trading and automation via smart contracts and decentralized autonomous organizations (DAOs) signal a framework within which compliance and risk management can be managed in real-time.

1. New assets and tokenization

    2. New infrastructure and automation
    • Digital-native securities: What if money market funds (MMFs) were tokenized for collateral management, enabling fractionalization and split rights for lending, voting and dividends?

    • Tokenized real-world assets (RWA): What if private equity, real estate and other illiquid assets were tokenized, creating new opportunities for lending and margin pools?

    • Stablecoins and digital cash: What if stablecoins enabled instant, universal margin top-ups across asset classes, streamlining collateral processes?
    • Intraday liquidity: What if repo transactions settled same-day using DLT and digital twin securities, enhancing liquidity management?

    • Around-the-clock trading: What if 24/7 markets enabled continuous lending and borrowing across time zones with real-time fees collection and intraday margining?

    • Automation with smart contracts and DAOs: What if smart contracts and DAOs automated operations, compliance and risk management, resolving disputes and checking regulatory adherence in real time?

    How EY can help

    Transition on the horizon

    The securities lending markets are in the early stages of transformation, driven by DLT and tokenization, introducing innovations like digital-native securities, tokenized real-world assets, intraday liquidity and around-the-clock trading in the near to mid-term, alongside the use of stablecoins and digital cash. Over the mid- to long term, smart contracts and DAOs can further revolutionize operations, risk management and compliance.
     

    • Digital-native securities: Fractionalized ownership could split shares into separate tokens for voting, dividends and principal, enabling new markets and trading strategies. This innovation may unlock greater liquidity and flexibility for investors in the near to mid-term.

    • Tokenized real-world assets: Real world assets can be securitized and moved on-chain with composable features, potentially enabling greater liquidity.

    • Intraday liquidity: Cross-border margin offsets can enable collateral posted in one region to automatically balance exposures elsewhere in real time. This would enhance intraday liquidity by reducing friction in global securities lending.

    • Around-the-clock trading: A 24/7 lending marketplace can enable continuous global lending and borrowing with live auctions and real-time fees.

    • Stablecoins and digital cash: Universal collateral tokens could simplify complex collateral processes, allowing instant margin top-ups using stablecoins and digital cash. This would streamline operations and improve efficiency across lending platforms.

    • Smart contracts/DAOs: Smart contracts and DAOs can enable automation to continuously monitor exposures in real time, enforce margin calls or unwinds without manual oversight, reducing operational risks and enhancing compliance functions in the mid-to-long term.

    Emerging use cases 

    Solutions are developing across diverse categories like tokenization, custody, lending, and compliance, enhancing market efficiency and accessibility, shaping the future of securities and lending markets.

    Tokenization platforms


    Tokenization platforms enable the creation and management of digital securities on blockchain networks.

    Custody


    Custody providers secure tokenized assets, safeguarding storage and regulatory compliance.

    Securities lending


    Securities lending facilitates the borrowing and lending of tokenized assets to enhance market liquidity.

    Tokenized cash 


    Tokenized cash provides digital representations of fiat currency for seamless transactions in tokenized markets.

    Tokenized funds


    Tokenized funds digitize investment vehicles, enabling fractional ownership and broader access.

    Collateral management


    Collateral management optimizes the use of tokenized assets as collateral in lending and trading.

    New assets

    These examples showcase how tokenized assets on blockchain technology are transforming securities markets, enabling faster settlement, enhanced transparency and broader accessibility for institutions and investors.

    Tokenized collateral management, bond issuance, repo trading/settlement

    Tokenized U.S. Money Market Fund (MMF)

    Key features
    • Margin and collateral: Optimizes margin efficiency
    • Custody and recordkeeping: Blockchain records ownership
    • Settlement speed: Programmable smart contracts enable precise settlement times and interest accruals
    • Price discovery and liquidity: Backed by cash, treasuries, stable pricing
    • Custody and recordkeeping: Blockchain facilitates accuracy
    • Reconciliation: Interoperability across blockchains

    New infrastructure

    These examples highlight how DLT and automation streamline securities lending, repo trades post-trade processes with faster settlements, shared ledgers and cost efficiencies.

    Collateral mobility using DLT

    DLT platform to agree, execute and settle repo transactions

    Post-trade automation with single data source

    Key features
    • Margin and collateral: Enhances collateral mobility via DLT, removing intraday credit and collateral risk
    • Custody and recordkeeping: Allows banks to fulfill collateral obligations in tri-party without needing to deliver securities out of their home custodian’s accounts
    • Reconciliation: DLT serves as the single source of truth to validate the ownership of the securities at any given point in time
    • Settlement speed: Intraday repo settlement
    • Margin and collateral: Smart contracts manage collateral
    • Custody and recordkeeping: Tokenizes securities in custody
    • Recordkeeping: A shared ledger with a record of agreements made between parties
    • Automation: Contracts with rebate rates tied to benchmarks changed automatically
    • Reconciliation: Provides mark price for all contracts on platform, maintaining that values are in sync for both counterparts at all times

    The way forward 

    To navigate this transformative phase, a comprehensive roadmap is essential. Organizations must focus on building their DLT foundations to facilitate instant settlements, scale tokenization across multiple asset classes, enhance interoperability for ecosystem growth and implement real-time data and automation to enhance operations. Ultimately, achieving standardized interoperability is necessary for widespread adoption of new technologies and practices in the global financial markets.


    As companies consider their next steps, collaboration, ongoing investment and innovation remain critical for survival and success in the evolving digital landscape. Embracing change will not only position them competitively but also unlock new opportunities and capabilities as the market continues to transition. 

    Kamol Mavlyanov contributed to this article.


    Summary 

    The future of securities lending is not merely about adopting new technologies; it’s about fundamentally rethinking and restructuring securities lending markets to thrive amidst rapid changes. Businesses must heed the lessons of past failures, adapt proactively and engage in collaborative efforts to ensure they are not left behind as the industry evolves. Collaboration, investment and adopting interoperable solutions in their digital journeys can position incumbents as well as new entrants to survive and thrive in the new reality.

    About this article

    Authors

    • Mark Nichols
      Principal, Capital Markets Strategy and Business Transformation, Ernst & Young LLP
    • Brendan Maher
      Managing Director, Financial Services Consulting, Ernst & Young LLP
    • Seha Islam
      Senior Manager, Financial Services Risk Management, Ernst & Young LLP
    Related topics
    Financial services
    Banking and capital markets
    Technology

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