Institutional investors—stung by the credit crisis and market volatility present in late 2008—have become stingy with their assets and are in the process of unwinding their securities lending practices.

According to the Callan 2009 Securities Lending Survey of 72 fund and plan sponsor organizations, cash collateral reinvestment losses—both realized and unrealized—are the top concern for 76% of respondents. Almost half (48%) of respondents with securities lending programs are undergoing a controlled withdrawal to reduce the risk profile of the program and minimize current and future losses.

The controlled unwind is the most common strategy and is being used for rebalancing and raising cash for liquidity. Almost all respondents are utilizing their current custodian or securities lending provider for the unwind and expect to complete the process within one to three years.

Respondents are also reviewing their investment policies and guidelines with an eye to managing risk, tightening compliance, seeking better transparency and disclosure and finally, strengthening accountability. Less than half are concerned about litigation.

“Collectively, the majority of plan sponsors have placed a high priority on revamping their current securities lending programs,” says Callan Associates’ senior vice-president of the master trust, global custody and securities lending group, Virgilio Abesamis. “Pursuing litigation at this point would stop that process dead in its tracks until any legal issues were resolved.”

Changes
Despite concern over securities lending, only 44% of respondents are pondering changes to their programs. Among firms considering changes, 67% favour fine-tuning cash collateral reinvestment guidelines.

Further, more than one-quarter (27%) of respondents—including 64% of defined contributions plans—are looking to participate in funds that do not lend out their assets and nearly 20% indicate they may cap the program at a more manageable level. One-quarter say they may terminate their securities lending program altogether.

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