FINANCIAL TIMES MONDAY OCTOBER 6 2008 3 FTfm Pensions stop lending stock amid short Securities lending Average yearly fee to borrow stock selling debate (basis points) 2005 2006 2007 2008 Europe 20.68 19.45 28.64 34.23 US 7.49 5.61 3.93 4.01 UK 45.12 33.70 38.28 40.74 The UK’s Investment Man- Asia (HK/Singapore) 21.85 27.81 29.85 28.75 The Big Picture agement Association has Japan 21.81 18.68 21.46 22.06 advised its members to “con- But the industry is sider carefully the implica- Market size, almost unanimous tions of any participation in the lending of stocks in UK Q4 2007 ($bn) Investable Assets Average stock in agreeing that banks”, bearing in mind the Security Type assets to borrow on loan equities borrowing need for an orderly market and the risk to clients’ inter- All Equities 36,000 13,000 2,100 is a good thing, ests “should lent stock be Americas equities 17,000 6,700 950 European equities says Steve Johnson used against them”. Richard Saunders, chief 11,000 3,700 620 Asian equities 7,000 1,700 300 executive, said he believed Exchange traded funds 750 380 70 Short selling and the securi- asset managers had reined ties lending it relies upon back their stock lending Depository receipts 1,500 750 83 have moved from the mun- operations in the wake of Sources: Data Explorers; Spitalfields Advisors FT Graphic Photo: AP dane to the controversial in the IMA’s call. a matter of weeks. However, the global fund For years, stock lending management industry is typically 20-40 basis points However, some stock lend- in money market funds. fiduciary duty to their inves- has acted as a lubricant, oil- almost unanimous in agree- for most markets, but mark- ers did lose money when Mr Rule, one of many in tors. ing the wheels of markets ing that, in normal circum- edly lower in the US where their collateral was invested the industry who does not Strathclyde’s Mr McIndoe and providing a modest stances, stock lending is a supply tends to massively in structured investment believe short sellers are able disagrees, stating: “If it was boost to the revenues of good thing and should con- outweigh demand. In the vehicles (SIVs) operated by to affect share prices for a bigger income stream, asset managers and pension tinue. final quarter of last year the major banks, many of which anything more than a few maybe I would take the fidu- funds in the process. “If you don’t have stock utilisation rate, the propor- collapsed at the start of the hours, even argues asset ciary point. I think my major But now, amid populist lending you won’t have a tion of time available stock credit crunch. Cash is today owners that do not lend fiduciary duty is to protect fury over the actions of stock market. The liquidity actually spent on loan, was more likely to be invested stock are not acting in their the value of our holdings.” short sellers who may, or 16 per cent. may not, have contributed to Not all of this lent stock is the collapse in confidence in Dispiritingly few used to short stocks. Borrow- swathes of the US and Euro- industry ing occurs for a variety of pean banking systems, some reasons, such as allowing asset owners are reassessing participants were dividends to be paid to insti- their lending activities. Calstrs and Calpers, the willing to defend tutions with the lowest tax rates, providing liquidity to two heavyweight California the practice of market makers and meeting public pension schemes, the collateral needs of bro- New York State’s Common stock lending on kers. More controversially, Retirement Fund and Dutch the record activist investors can use peer APG have temporarily borrowed stock to increase suspended the lending of will dry up and there will be their voting rights. some of their financial no incentive to buy or sell “Stock lending is much stocks. stock. If you look at markets more important than short Vanguard, the $1,300bn that don’t have it, such as selling. In western Europe (£730bn, €925bn) US fund India and China, their stock and North America lending manager and the Strathclyde markets have wild swings,” is very widespread. In pension fund, the UK’s larg- says a leading figure from a emerging markets in general est local authority scheme, large custodian bank which it is more patchy,” says have gone further, temporar- lends stock on behalf of its David Rule, chief executive ily shutting down their clients. (Dispiritingly few of the International Securi- entire securities lending industry participants were ties Lending Association. programmes. willing to defend the prac- “The main benefit for lend- “Lending is a very mar- tice of stock lending on the ers is income at what can be ginal source of income for us record – a sure fire way of low risk. You can take high so if there is any perceived guaranteeing the industry quality collateral such as increase in risk because of loses the debate in the court government bonds with a the connection between of public opinion). margin in your favour and lending and short selling it Stock lending developed in you can stipulate return of could be self-defeating for us the 1970s, but really took off stock on demand. There is to lend,” says Richard McIn- after the financial market no reason not to do it if you doe, head of pensions at the liberalisation of the 1980s are comfortable with the Strathclyde scheme, who that made the process more risk you are taking.” says the £9bn fund earned tax efficient. It has now However, the process is £1m to £1.5m from lending become a multi-billion dollar not entirely risk free. Leh- stock last year. business. State Street, a cus- man Brothers was a big bor- “It doesn’t take much of todian bank, says it gener- rower of stock shortly before an increase in market risk to ated $352m from stock lend- it collapsed, although it is completely outweigh the ing in the second quarter of not believed that many lend- income from it.” 2008; with custodians typi- ers lost money; they were APG, the Dutch govern- cally keeping just 15 per cent instead able to sell the col- ment and education sector of the revenues, this would lateral, typically cash or gov- fund, says it earned €130m imply income of $2bn for ernment paper worth about for its €217bn portfolio from asset managers, insurance 105 per cent of the lent stock lending in 2007. It says companies and pension stock, and buy the equities the aim of its partial suspen- funds. back without incurring a sion of lending is to “dis- Figures from Data Explor- loss. “The feedback I’m get- courage short sellers” and ers and Spitalfields Advisors, ting is that most people “contribute to more stable two research companies, didn’t lose money,” says Mr financial markets”. suggest that lending fees are Rule.
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