As Regulators Step Up, Securities Lending Comes Under the Spotlight

Regulation is a certainty in many different niche financial markets, and so it was only a matter of time before the SEC turned its gaze toward securities lending, which saw seemingly risk-free practices turn risky in 2008.

(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.

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“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.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>

With higher-margin services on the decline, European custodians have started to raise basic rates, and the trend is expected to continue if proposed depository rules are enacted.

(September 24, 2009) – European custodians, following a drop-off in high-margin services such as securities lending, are raising prices for pension schemes.

According to Financial News (FN), this rise in prices—up to a 30% increase, according to sources—is the first in 20 years. According to a consultant interviewed by FN, this is a result of “bankers scrambl(ing) to make good a loss of income from add-on services that clients no longer want.”

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Previously, custodians kept basic fees low by enticing asset owners to use high-margin services; however, following severe losses related to securities lending and other such services, their use has declined markedly. With these services being used less, custodians have turned to raising basic fees to make up for lost revenue.

According to FN, this trend may accelerate if proposed European Union depository rules are enacted. These rules—under the Alternative Investment Fund Managers Directive—would impose stringent liability of custodians, which could cause costs to rise.

The Directive has been widely panned across the continent. According to European Voice, Sharon Bowles—the chair of the European Parliament’s economic and monetary affairs committee—is warning that increased regulation will cause investors to move elsewhere. “Every time you add an expense (through regulation), you are dropping the yield for the European investor,” she is quoted as saying.

To contact the <em>aiCIO</em> editor of this story: Kristopher McDaniel at <a href='mailto:kmcdaniel@assetinternational.com'>kmcdaniel@assetinternational.com</a>