While securities lending has been vilified in the media, experts say it’s not the devil everyone thinks it is—it’s just misunderstood.
“Securities lending is almost a religious issue,” said Mark Fieldhouse, head of technical sales with RBC Dexia Investor Services, speaking at the Second Annual Securities Lending Summit hosted by Canadian Investment Review in Toronto. “Is it good? Is it bad?”
Although securities lending got a bad reputation in the recent market meltdown, experts say it plays a valuable role for Canadian investors, offering strong returns and providing a cushioning effect in falling markets. “Securities lending and short-selling are vital,” said Tim D’Arcy, managing director, SunGard Astec Analytics. “It is one of the criteria for determining that a country has a good economy.” Speakers at the summit discussed the state of the industry in 2008, cash versus non-cash collateral, the challenges for borrowers, beneficial owners and lending agents and the outlook for securities lending in the future.
Lack of Understanding
The need for greater disclosure, transparency and risk awareness in lending arrangements is one important lesson learned from the events of fall 2008. Market, operational and counterparty default risks quickly became reality with the failure of Lehman Brothers.
“All lending programs are not created equal,” said Mark Faulkner, head of innovation, data explorers, and director and founder of Spitalfields Advisors. He explained that the financial strength, capital and reputation of the counterparties involved in securities lending, as well as increased scrutiny of legal agreements, have become much more important as a result.
Experts also discussed regulatory reactions to the credit crisis around the globe—from bans on short-selling (the Netherlands and Italy, for example, still have bans in place) to new rules and regulations (the U.K. is considering a new disclosure rule for large short-sellers and the E.U. is looking at capitalization rules).
A Collaborative Approach
Yet while each country seeks new ways to regulate and monitor securities lending practices, there is also a movement to harmonize the industry. The International Organization of Securities Commissions wants to set up universal rules that all countries can live with, said D’Arcy.
Canada, too, is adding its voice. Representatives from the founding firms of the newly created Canadian Securities Lending Association (CIBC Mellon, State Street, Northern Trust and RBC Dexia Investor Services) discussed the association’s goal to provide a unified voice for securities lending participants and to demonstrate leadership in the industry.
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