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"It's been viewed as an administrative decision," says Lisa Laird, practice leader in the Los Angeles office of Watson Wyatt Investment Consulting. "But we've seen in the last year that securities lending can have real risks, and needs to considered part of the investment process." Earnings on lending have fallen with interest rates, and the seizing up of credit markets has led to losses. "The risks in securities lending have been there for 20 years, but recent market events have opened our eyes," says Charles Millard, director of the Pension Benefit Guaranty Corporation (PBGC). This past week the agency issued a request for information from securities lending providers (see PBGC Looking for Securities Lending Partners ), the first step toward developing best practices for the business - as the PBGC did earlier in 2008 when it promulgated a set of standards for portfolio transition management (see PLANSPONSOR September 2008, "A new track for transitions "). "PBGC needs to bring to its securities lending program a view of proper risk-adjusted return on capital, as we do with any other assets," he explains. Many institutions - pension funds, mutual funds, and others - lend portions of their long-term holdings to other players in the market. (US institutions tend to lend about 20% of their holdings, according to the Risk Management Association.) The borrowers give provide the lender with collateral, often in the form of cash, and the lender agrees to pay them a "rebate rate" on the collateral, determined by the scarcity of the security being lent. During the lending period, the collateral is generally invested in some type of short-term investment fund, which is, in turn, composed of high-quality short-term instruments. The difference between the STIF earnings and the rebate rate is split between the lending institution and the agent that carries all this out, typically a custodian bank.
"It's been viewed as an administrative decision," says Lisa Laird, practice leader in the Los Angeles office of Watson Wyatt Investment Consulting. "But we've seen in the last year that securities lending can have real risks, and needs to considered part of the investment process." Earnings on lending have fallen with interest rates, and the seizing up of credit markets has led to losses.
"The risks in securities lending have been there for 20 years, but recent market events have opened our eyes," says Charles Millard, director of the Pension Benefit Guaranty Corporation (PBGC). This past week the agency issued a request for information from securities lending providers (see PBGC Looking for Securities Lending Partners ), the first step toward developing best practices for the business - as the PBGC did earlier in 2008 when it promulgated a set of standards for portfolio transition management (see PLANSPONSOR September 2008, "A new track for transitions "). "PBGC needs to bring to its securities lending program a view of proper risk-adjusted return on capital, as we do with any other assets," he explains.
Many institutions - pension funds, mutual funds, and others - lend portions of their long-term holdings to other players in the market. (US institutions tend to lend about 20% of their holdings, according to the Risk Management Association.) The borrowers give provide the lender with collateral, often in the form of cash, and the lender agrees to pay them a "rebate rate" on the collateral, determined by the scarcity of the security being lent. During the lending period, the collateral is generally invested in some type of short-term investment fund, which is, in turn, composed of high-quality short-term instruments. The difference between the STIF earnings and the rebate rate is split between the lending institution and the agent that carries all this out, typically a custodian bank.
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