Who is responsible for the investment of cash collateral in securities lending?

In the context of securities lending, the responsibility for investing cash collateral typically falls to the agent bank. The agent bank acts as an intermediary between the lender and borrower, managing the securities lending transaction and handling the cash collateral placed by the borrower.

When securities are lent out, the borrower provides cash collateral to the lender, which can be reinvested to generate a return. The agent bank manages this reinvestment process, making investment decisions on behalf of the lender. This role is crucial because the performance of the invested collateral can directly impact the overall profitability of the securities lending arrangement for the lender.

The lender, while owning the collateral, often delegates investment discretion to the agent bank for reasons such as expertise, the desire to manage risk, and ensuring compliance with various regulations. This delegation allows the lender to focus on their primary business without having to manage the cash collateral investments themselves.

In situations like this, the borrower's role is primarily to provide cash collateral and return the borrowed securities, without an active role in the management or investment of that collateral. Broker-dealers may also be involved in the securities lending process but typically do not manage the investment of cash collateral directly.