JP Morgan to Pay $150 Million in Securities Lending Pension Lawsuit

(March 21, 2012) – A lawsuit headed by three American union pension funds against JP Morgan (JPMC)—brought over securities lending losses—has been settled for $150 million.

The AFTRA Retirement Fund, the Imperial County Employees’ Retirement System, and the Investment Committee of the Manhattan and Bronx Surface Transit Operating System had been named the lead plaintiffs for the class. According to court documents, the suit related to “investment of certain ‘securities lending’ clients’ cash collateral in the June 2009 Medium-Term Notes of Sigma Finance, Inc., a structured investment vehicle that collapsed on September 30, 2008.”

“[T]he evidence of record . . . establishes that (JPMC) predicted Sigma’s collapse,” the suit contended. The firm also allegedly “engaged in predatory repo with substantial haircuts to ‘cherry-pick’ the best assets in Sigma’s portfolio for itself, immediately depleted the quantity and quality of Sigma’s assets by taking title to assets in an amount that exceeded the financing it provided by nearly a billion dollars; and ultimately reaped nearly $2 billion of profits for itself while leaving the Class’ notes virtually worthless.”

While a settlement of the suit was announced in February, the amount of $150 million was released in court documents obtained by Bloomberg.

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The case is Board of Trustees of the AFTRA Retirement Fund v. JPMorgan Chase Bank NA, 09-cv-686, U.S. District Court, Southern District of New York (Manhattan).

(March 21, 2012) — Banking regulation Basel III could breathe new life into the securities lending sector, market participants claimed yesterday at a forum in London.

Heads of securities lending teams from some of the world’s largest custodian banks cited items under the Basel III framework that could mean more supply and demand for the practice.

The panel was discussing where future revenue in the sector was likely to flow from at a conference hosted by market monitor Data Explorers in London yesterday. Panel members, who were discussing the issue on a ‘non-attributable’ basis, included the heads of securities lending of BNY Mellon, BNP Paribas, Societe Generale, RBC Dexia and RBS.

Revenues in the sector were reduced significantly during the financial crisis as asset owners – usually large institutional investors – were concerned about counterparty risk. Adding to the fall in activity was the curb of hedging, which makes up a large part of borrowers’ usage, by international regulators.

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One of the panellists said terms in the Basel III regulation, aimed to make banks safer, had provided new avenues for the securities lending sector.

He said: “In the rules on leverage and capital ratio the same good news keeps coming up: corporate bonds are eligible as high quality collateral under the rules. So, for a beneficial owner, Basle III gives demand for my customers’ corporate bonds like never before. My clients are prepared to explore new trades and some of the regulations are helpful.”

Another panellist said corporate bonds that were rated AA- or above would be considered 100% liquid unlike equities.

The panel said the topic of collateral was pertinent for fund managers of, and investors in Ucits funds, which require holdings to be incredibly liquid.

One panellist said: “Risk appetite in the beneficial owner world is being adjusted to look at different collateral so some greater flexibility from clients is coming.”