Lean times for sec lenders after the shorting ban

As the capital raisings of 2009 turn into the M&A activity of 2010, the co-chair of the Australian Securities Lending Association (ASLA) predicts a return of transaction volume for his constituents, and a recovery in the income generated by lenders of stock. Peter Martin, whose day job is running securities finance at State Street Australia, says the problem is no longer supply of stock for loan, with $200 billion currently available in Australia, which he says is consistent with supply 18 months ago. Supply did threaten to become a problem in 2008. Some investors recalled stock and suspended their securities lending programs, against a backdrop of the shorting ban coming into effect, and media hysteria as the likes of ABC Learning’s Eddie Groves blamed hedge funds for the damage inflicted on their shareholders.

An early and well-publicised withdrawal from securities lending was made by Equipsuper, the $4 billion-plus industry fund, and its program remains suspended to this day. However Robin Burns, the outgoing CEO of Equipsuper, says his fund was one of the few to translate its concerns about securities lending into action. “We never had a philosophical problem with short-selling, we just didn’t think it was in the interests of a long-term investor like us to be lending stocks to traders so they could be hammered. We had concerns about transparency and control, and they remain,” he says. “A lot of people from other funds came out saying that they agreed with Equipsuper’s stance, but then they must have taken another look at the revenue. Not that many ended up following us.” The irony is that today, the income funds can make by lending their stock is far less than it was in 2008, because the net result of all that public outcry against short-selling was a ban on the practice, which for financial stocks lasted from September 2008 to May 2009.

In a similar way that private equity managers have been spooked from our shores by the ATO ruling that managers’ divestiture profits be taxed as income rather than capital gains, the shorting ban has had the enduring effect of keeping hedge funds away from Australia. “Many hedge funds and institutional fund managers had to unwind their strategies as they were unable to effectively manage their portfolios, with so many names they were unable to short,” Martin says. “Those funds have not necessarily returned to the Australian market.” In fact, Stewart Cowan, client manager for securities lending at JPMorgan Worldwide Securities Services, says there is evidence that markets such as Hong Kong are now benefiting from the injection of liquidity withdrawn from the ASX by managers at the time of the shorting ban. Martin also notes that borrowers have developed much more sophisticated systems to ensure they utilise their own ‘internal’ supply before looking to borrow from the traditional agent lenders.  At the coalface, super funds are counting the cost of the shorting ban in terms of lower income from their programs to pass on to members. CARE Super, which lends assets from its $1 billion Australian equities portfolio only, made $65,000 from investing the collateral posted by borrowers of its stock in the September quarter of 2007.