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					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.