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.

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

Australia announced late February
that it would be ‘tagging’ all securities which are lent from October this year
and would be introducing new reporting requirements on both lenders and
borrowers from the end of the calendar year.

Leigh Watson, regional general manager
and head of NAB Custodian Services, who chaired the session, asked each
panellist to predict whether the Australian Securities and Investments Commission
would lift the ban on shorting financial services stocks a few days later. Each
correctly predicted that the ban would remain.


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