Regulation Hits UCITS Funds Securities Lending

UCITS funds in Europe are being increasingly restricted in engaging in securities lending as new rules continue to bite, according to a new report.

According to the International Securities Lending Authority (ISLA), which issued its half-year report this week, restrictions on UCITS have “undermined the participation of mutual funds in lending programmes.”

Under rules set out by the European Securities and Markets Authority (ESMA), UCITS can only enter into repo and reverse repo agreements if they can recall the assets or cash at any time. Furthermore, UCITS are restricted engaging in fixed term securities lending.

As a result, mutual and retail funds represent 18% of all securities on loan globally, according to ISLA.

However, combined with pension funds, they account for 66% of the reported €14 trillion of securities made available for lending by institutional investors.

During the first six months of 2015, on-loan balances increased 8.5% globally €1.8 trillion, of which equities and exchange traded funds (ETFs) represented 51% of all outstanding loans. Government bonds accounted for nearly two-fifths of securities on-loan.

The proportion of loans backed by non-cash collateral grew from 55% at the end of last year to 60%, whereby 90% of all European government bond loans were collateralised with other securities.