ISLA believes that regulators are comfortable with the concept of securities lending, which, when properly regulated, is positive for all markets and market participants.
Paul Tucker, Deputy Governor Financial Stability, Member of the Monetary Policy Committee and Member of the Financial Policy Committee at the Bank of England, in his address to the Association of British Insurers, stated that “nothing must be done to jeopardise the essential functions of securities lending”. He expanded by saying: “Securities lending is essential for any capital market to work efficiently. Liquidity requires market makers or traders who willingly incur short positions to meet buyers’ orders. They will do so only if they can cover their short positions - meaning that they need to be able to borrow securities to deliver them into their sold positions. This in turn requires investors in those securities to be willing to lend them”. To ISLA, this represents as authoritative a statement as could be made on the need for securities lending, a practice that has existed for centuries.
On the subject of short-selling, since 2008 there have been a number of academic studies into the potential impact of short-selling activity on underlying asset prices. Various jurisdictions introduced restrictions or outright bans on short-selling, which gave these studies empirical evidence on which to conduct their analysis. The overwhelming conclusion of these studies is that there is no meaningful correlation between short-selling activity and underlying asset prices. Indeed, the only discernible impact where short-selling bans were introduced was a marked reduction in secondary market liquidity, and a widening of bid/offer spreads in the relevant securities, to the ultimate detriment of investors.
ISLA would also like to point out that, in terms of an individual institutional investor, securities lending is a discretionary activity. Should an institution have any concerns over any aspect of the securities lending industry including the potential impact of short selling, it need not participate in this activity. In addition, it is for each individual institutional investor who chooses to lend its securities to choose further between the value they identify in exercising their shareholders voting rights (and hence recalling their stock to enable their participation in voting) and the importance of earning additional income from maintaining their participation in a securities lending programme.
It has been estimated that it earns over €1 billion per annum for European beneficial owners such as pension funds, insurance companies and other long-term investors. Participation in the practice can therefore give long-term asset holders such as pension funds and insurance companies a useful additional income stream to help meet their ultimate obligation to their stakeholders and policyholders.
ISLA has actively promoted the production of educational documents to help beneficial owners fully understand the risks, rewards, procedures and options within stock lending. In addition, ISLA makes clear in its industry-wide documentation that “borrowing to vote” is not acceptable market practice.
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© ISLA - International Securities Lending Association
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