Mary Schapiro, chairman of the Securities and Exchange Commission, has chaired two days of round table meetings to discuss the need for more transparency and possible restrictions on the multi-billion dollar securities lending market.
Generally thought of as low risk, the activity becomes another destabilizing factor in times of economic crisis.
Securities lending is used by mutual funds, exchange-traded funds (ETFs) and other institutional investors to generate extra returns from their assets by lending out shares against cash collateral. Borrowers are typically hedge-funds or other short-sellers, who sell the borrowed shares in the expectation of buying them back at a lower price before returning them to the lender.
The SEC has said it is considering possible new rules on securities lending practices amid concerns of the lack of a central public marketplace that displays quotes and also potential conflicts. The discussion focused on institutional lending, which accounts for the bulk of the market , which, despite the financial crisis of 2008, totalled USD400bn for stock lending on a global basis as at June 30 - down from the peak of USD850bn in 2007, but the trend is turning up again.
"Securities lending was once thought to be a way to earn a few extra points of return, with little or no risk," said Schapiro. "Events of last year reveal the risk was present. As a result, we need to consider ways to enhance investor-oriented oversight of this multi-trillion dollar market."
Chairman Schapiro added: "We also must focus on a flip-side of securities lending — short selling. That's why the roundtable will also examine potential short sale pre-borrow and hard locate requirements and short sale disclosures."
Panel topics included discussions of securities lending practices, possible short sale pre-borrowing requirements and additional short sale disclosures.
Roundtable participants included representatives of corporate issuers, financial services firms, beneficial owner lenders, lending agents, borrowers of securities, self-regulatory organizations, international regulators and the academic community.
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