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In the letter, ISLA points out a large numbers of academic studies into the potential impact of short-selling activity on underlying asset prices both prior to and through the financial crisis (including when a number of jurisdictions introduced restrictions or utright bans on the activity). “The overwhelming conclusion of those studies was that there was no meaningful correlation between short-selling activity and underlying asset prices, and 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", the letter reads.
According to ISLA’s conservative estimate, long term institutional investors (such as pension funds) earned over €1 billion from lending their securities. Participation in the practice could 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.
In response to whether the FCA Should review the regulation of stock lending by custodians, ISLA believes that the existing regulations contained within the FCA handbook (which require a specific agreement to exist between client and custodian for stock lending to take place) are sufficient to deal with any perceived risk that custodians may not be appropriately rebating revenues. Furthermore the ESMA Guidelines provide further comfort to the extent that a pension fund may invest in the units of a collective investment fund which undertakes stock lending.
Original consultation, 22.10.13