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But some observers believe moves by regulators to impose stricter rules on securities lending could hurt returns to investors, reduce profits for asset managers and increase the risk of asset price bubbles developing in financial markets.
Stefan Gavell, head of regulatory affairs at State Street, the US financial services group, says securities lending activity remains well below the levels seen before the financial crisis, partly due to increased risk aversion but also because the stricter rules have made lending less attractive financially.
“There have been more than 25 regulatory initiatives globally that have affected demand and supply levels for securities lending, as well as the structure of transactions,” says Mr Gavell.
He believes securities lending is “a socially useful activity”, adding that it would be “regrettable” if activity levels fell further.
Charles Jones, a finance professor at Columbia Business School in New York, adds that stricter regulations for securities lending could lead to asset prices becoming “unhinged” from their fundamental values. Although the new rules are not likely to affect the availability of the largest and most liquid US stocks for securities lending, they could have a greater impact on transactions related to smaller companies, he says.
“End investors should be concerned because impeding short-selling activity could lead to asset price bubbles forming,” says Mr Jones.
Nonetheless regulators are continuing to increase their monitoring of securities lending, which remains an opaque market with limited publicly available data.
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