ANALYSIS

Counterparty risk prompts changes in sec lending

Susan PikeMore than two thirds of the institutions that made changes to their securities lending programmes on the back of the global financial crisis cited less confidence in counterparty stability as the driver,
research has revealed, however less than 20 per cent suspended participation following the market volatility.

A survey by RBC Dexia of 86 investment managers and financial institutions globally showed just 17 per cent of
respondents suspended their sec lending programmes during the last eight months, while 60 per cent made no changes at all to their programmes.

CalPERS decided to continue its securities lending programme following an annual review earlier this year, despite
significant pressure on its collateral pool, with income of $220 million generated for the year to March but unrealised losses on the internal collateral reinvestment of $854 million.

Other funds, such as the UK’s London Pensions Fund Authority (LPFA) suspended securities lending after the Lehman’s
collapse, while BT Pension Scheme added 20 financial institutions globally to its list of restricted firms.

Those survey respondents that did make parameter changes focused on risk mitigation and capital preservation, which 80 per cent of respondents rated as highly important, signalling a shift towards greater oversight and increased involvement in programmes by sec lending participants.

The most common adjustment was in relation to borrowing counterparties, cited by 38 per cent of those that made programme changes, followed by adjustments to the type of collateral accepted. A further 21 per cent changed margin requirements, and 18 per cent altered cash reinvestment parameters.

The shifts in programme parameters were driven by reduced confidence in counterparty risk (65 per cent), lower risk
tolerance (59 per cent), a need for greater levels of indemnification and provider strength/stability (44 per cent), short selling restrictions (32 per cent) and a desire to avoid cash reinvestment losses (9 per cent).

Susan Pike, global head of market products at RBC Dexia, says the key to success in sec lending is to actively manage,
monitor and review policies and procedures on an ongoing basis.

“Despite some concerns over the short-term outlook for securities lending in the midst of market turmoil, our survey
indicates that lenders have continued to customise programmes to match their risk/reward tolerance rather than withdrawing from the market,” she says.

The survey also sought to explore the perceived link between short selling and the movement of share prices, with
nearly all respondents (92 per cent) indicating that this had some influence, including 32 per cent that viewed this as significant.

More than half of the respondents were based in Europe, while a third were from North America, around 13 per cent were from Asia and Australia and less than 2 per cent were from the Middle East.