As Regulators Step Up, Securities Lending Comes Under the Spotlight

(October 1, 2009) – The Securities and Exchange Commission (SEC) is reportedly looking into the need for fresh regulation in the securities-lending business, where institutions saw seemingly risk-free bet turn sour in 2008.

According to The Wall Street Journal (WSJ), SEC chief Mary Shapiro made statements to this effect at the beginning of a Tuesday roundtable hosted by the regulator.

“For a long time, securities lending was regarded and described as a relatively low-risk venture, but the recent credit crisis revealed that it can be anything but low risk,” Schapiro told the gathered panelists, according to the WSJ. “Many questions have arisen with respect to the securities-lending market and whether it may be improved for the benefit of market participants and investors.”

According to the WSJ, some panelists indicated that the SEC should step in in order to protect institutional investors from future losses in the securities-lending market. While the SEC has offered no concrete proposals to alter the market right now, it is widely suspected that such proposals are not far off.

Transparency was also a topic, with some suggesting that central public marketplaces would make explicit current prices and expose conflicts.

The slowdown in securities lending—a result of losses to counterparty credit risk in the tumultuous markets last fall—has affected more than the institutions and banks that often profited from the market. Hedge funds—which borrowed the securities from mostly pension funds via an intermediary—have had a harder time accessing securities for short selling. Short selling was set to be discussed on Wednesday in a similar roundtable setting.