A number of UK industry bodies have published a series of guides for help pension fund trusts understand the $2.5 trillion securities lending market. The publications come eight months after Frank Field, MP for Birkenhead and former pensions minister, associated the securities lending practices of custodians to the activities of Robert Maxwell, former MP for Buckingham, and pension fund embezzler.
As a result of the comments by Field, the Bank of Englands Securities Lending and Repo Committee began work on the guides, endorsed by the Association of British Insurers, British Bankers Association, ICMAs European Repo Council, Investment Management Association, International Securities Lending Association (ISLA), Local Authority Pension Fund Forum, National Association of Pension Funds (NAPF), as well as securities services consultant Thomas Murray.
According to Kevin McNulty, chief executive of ISLA and a member of the SLRC working group: There has been concern in some quarters that not all pension fund trustees adequately understand securities lending and may be unaware of its potential benefits or uncertain as to any risks it might pose and how to deal effectively with them. We were very pleased to work with such a wide group of trade bodies and regulators in developing these materials and hope they provide a clear introduction.
Heavy losses in cash collateral, government intervention and declining spreads as well as lower volumes has caused the entire industry to re-examine their business models, and while many pension funds lost money through their securities lending practices, others have been taking steps to understand the risks involved for some time. The London Pension Fund Authority (LPFA) originally ceased stock lending in 2008 after the collapse of Lehman Brothers, and after a thorough review, decided to re-enter the market in 2009. In an interview with Global Custodian just after the pension fund decided to start re-lending stock, Mike Taylor, CEO of the LPFA explained: We have reviewed our lending arrangements so no longer do we accept cash or equities as collateral, and this has been done in conjunction with J.P. Morgan, and we feel we are complying with the best practice as proposed by such organisations as the International Corporate Governance Network. We have a contract with J.P. Morgan that says what can and can’t be borrowed, and what collateral can’t be taken.
The Guide can be found here
To listen to GC News Editor Giles Turner interview LPFA CEO Mike Taylor about its decision to begin lending stock again, please click here