PBGC Taking a Fresh Look at Securities Lending
December 15, 2008 (PLANSPONSOR.com) - Securities
lending programs have long been a way for institutions to add
a little income, to help offset custody fees, or pay for some
of their staff costs.
"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.