Several trade groups associated with securities lending came together to defend their industry, after recent talks that blamed short selling for the financial downturn.
The International Securities Lending Association (ISLA), Risk Management Association (RMA), Securities Industry and Financial Markets Association (SIFMA), Pan-Asian Securities Lending Association (PASLA) and Australian Securities Lending Association (ASLA) released a joint statement recognising the need for regulatory changes to “support their objective to protect the integrity of markets and guard against financial instability.”
The groups add, however, that such moves could have unintended consequences to the markets and need to “avoid unintended damage to the liquidity of cash equity and related derivatives markets.” Securities lending, they say, is a vital aspect of a strong market:
“In particular, dealers must be allowed to take short positions in the course of providing liquidity for their customers. They need therefore to continue borrowing financial shares from lenders, such as pension and investment funds and insurance companies, for this purpose. Continued lending is also important in order to prevent chains of failed settlements.
For these reasons, we ask that regulators do not introduce measures that might prevent or discourage lending of financial shares. For example, selling shares that are currently on loan should not be treated as entering into a short position where the seller can recall the lent shares within the normal settlement cycle. Lenders should also be able to lend in good faith without requirements to make enquiries about or obtain documentary proof of the intentions of borrowers.”
“More generally, we encourage lenders to continue to make financial shares available for lending in order to support market making and efficient settlement. Any wholesale withdrawal of financial shares would have highly unwelcome consequences for liquidity in the cash equity and derivatives markets that would be against the interests of investing institutions and contrary to the stated intentions of regulators in introducing these measures. We are encouraged by the response of securities lenders and again urge them to continue to lend and to maintain their on-loan positions as appropriate in light of their respective goals.”
Global Custodian will post a two-part interview with the director of ISLA this week.