Until recently, securities lending had all the hallmarks of a ‘free lunch’. It was modest, but easy money for superannuation funds. Securities were usually lent through a principal program, in which the custodian took on the counter-party and collateral risk, and provided that custodian was reputable, very little could go wrong.

The custodian on-lent the securities to borrowers, including hedge funds, who sometimes used the stock for short selling, but in a market where prices were continually going up, it was very hard for hedge funds to make money in that way. Even if it was obvious a company was in trouble, private equity frequently rode in and turned it around.

Now some of the stocks that are on loan are being returned at a fraction of their former values. Hedge funds and lending agents argue that short selling improves market efficiency – that those borrowed stocks were bound to plummet in price eventually anyway. And, if over-selling is occurring, it only creates value opportunities to buy.

Long only managers agree, but contend that the opacity of the lending industry creates an opportunity to circumvent the ASX shorting rules, and makes it impossible to tell whether price falls are actually due to genuine problems within a company.

With such a large proportion of the nation’s assets locked up in superannuation, superannuation funds lending stock has become an essential part of creating market liquidity. But if it is possible that the funds are facilitating a huge devaluation in their own portfolios through lending, a few basis points a year or half-price custodian fees hardly seems worth it anymore.

Because of the lack of transparency in the lending industry, to what extent the falls in prices are due to short selling, no one knows. One lending agent estimates the market size for lending Australian equities is probably about $70 billion. But they admit nobody has any real figures. You are likely to get as many different answers as people you ask.

Some superannuation funds have already decided to err on the side of caution. Equipsuper ceased its lending program last month. The fund’s chief executive, Robin Burns, says in a bear market environment where shares prices are under pressure, it appears that securities lending is exacerbating that downward pressure, and Equipsuper plans to stop lending until there is more clarity in the market. “We just think it is a matter of principle,” he says. “It is no longer in our members’ best interests. We are not against securities lending or short selling, and I don’t believe for one minute that short sellers were acting in collusion, but in the current environment, with the lack of transparency, the risks are no longer worth the return.”

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