According to one lending agent, a superannuation fund that stopped its lending program three or four years ago found it couldn’t re-enter the market when it changed its mind six weeks later. The agent said it was “cheeky” for a fund to pick and choose when it would add its revenue and liquidity to the market.
“Custodians require a stable supply of stocks on loan, and a fund that pulls out every time there is a negative market move is not a desirable client,” the agent said. JANA’s Clerk said the asset consultant has received a number of queries from its clients wanting reviews of their securities lending programs. JANA’s advice has been for the funds to continue.
Superannuation fund Host Plus has had a securities lending program for three or four years, co-ordinated by custodian JPMorgan Worldwide Securities Services. David Elia, chief executive officer, says the volatility in the market at the moment means the fund is making more money out of the program now than ever, although in the context of a $7.2 billion fund it’s still pretty small. “We’ve never asked JPMorgan for information on the counterparties they intend to lend our stock to. What would we do with that information if we had it? I’m of the view that you’re either in [securities lending] or you’re not. That being said, we have asked [our asset consultant] JANA to have another look at the program in light of some of the recent events, just to make sure it’s still providing a net benefit to our members.”
Another lender say it won’t make any difference if the Australian funds stop lending. The final outcome will be the same because funds overseas will continue to put their stock up for loan. “That will continue to happen, and they are much harder to regulate,” the lender says.
In any event, the securities which funds hold will not be protected from volatility created by lending unless the practice is stopped altogether. And there are a lot of entities in the securities lending market, including the Reserve Bank of Australia.
BNP Paribas’ Floate also points out that if a fund decides to stop lending its stock, it effectively increases the demand for that stock which drives up the price – a market distortion similar to that which hedge funds are accused of. If the securities lending industry is to have greater transparency, it will be driven by the prime brokers. Patrick Liddy, director of marketing and strategy at NAB Custodial Services, says the brokers he has spoken to say they want to have a position of monitoring the naked shorts and the gearing. “They’re actually insisting that they do this and are going out on the front foot.” If you are a super fund or insurance statutory fund, your investment time horizon is long term.