Super funds should approach securities lending as an investment decision and manage the risks accordingly, the 2009 I&T/Australian Custodial Services Association Investment Administration conference was told. Lending and borrowing of stock were mutually co-existent, according to specialist consultant Drew Vaughan, of Dymond, Foulds & Vaughan. “Often, the institutional investor is on both sides of the equation, maybe even borrowing some of the same securities they are lending.
However, the two are not dependent on each other,” he said. “Shorting may accelerate the fall in a stock’s price in the short term but it will not be the cause of it.” Each of the three panelists on this session at the conference, entitled ‘Securities Lending and Shorting – What’s a Fund To Do?’ – was supportive of the role securities lending and shorting played in both improving the efficiency of markets and providing additional returns for super funds.
Jonathan Green, senior manager, investment facilities, at NSW Treasury Corporation, said that the risks associated with securities lending needed to be approached in the same manner as other investment risks. “T-Corp started its program at the end of 2007,” he said. “We vetted all of the counterparties on their credit rating and where they stood within the capital structure.” It was important to know, for instance, whether the contracted counterparty was, indeed, the parent company or a subsidiary whose position might not be guaranteed.
It was also important to know one’s standing in the event of liquidation and the position of the cash collateral. Peter Curtis, senior manager of investments at AustralianSuper, said that the highest level of lending by his fund did not coincide with periods of big headline shorting situations. “They (the loans) peaked in January 2007 and in January 2008,” he said. “The numbers show that there is a lot of shorting when markets go up and not a big increase when markets went down.
This was true even for highly publicised cases, such as ABC Learning, where lending went to a low level as the stock fell.” Curtis emphasised the importance of transparency and the market being fully informed about the amount of activity in a stock.
“There needs to be increased disclosure about what’s on loan; we need to know when positions are being closed out, but I don’t know who the best party is to provide that information.” The Reserve Bank of