Banks Slap on SecLending Limits

October 14, 2008 ( - State Street Global Advisors (SSgA) has informed its securities lending clients that they are now barred from pulling out their money all at once from the firm's securities lending funds.

The Wall Street Journal reported that SSgA clients who want to cash out of the securities lending funds will be allowed to proceed, but that part of their money now will be deposited in a separate State Street investment pool.

“Our securities-lending program remains strong,” a spokeswoman for the Boston company told the Journal. “We have not experienced any losses, and there are no restrictions on normal course transactions within the lending funds.”

The Journal said State Street offers at least four of the funds, which loan the securities of investors and then manage cash collateral received in exchange for the securities with the funds invested in various short-term instruments.

According to the news report, Northern Trust Corp. and Bank of New York Mellon Corp. also have imposed securities lending restrictions.

Heading Off a Redemption Wave

The news report said the securities lending restrictions underscore the continuing scramble by firms with securities-lending programs to head off a potential redemption wave fueled by the frozen credit markets.

Turmoil in the markets has turned what had long been reliable gains from loaning shares into losses and firms that facilitate securities lending “are putting people on notice that they want to discourage any run on the fund,” said Jim Meynard, executive director for the Georgia Firefighters Pension Fund, which is a client of State Street’s securities-lending program, the Journal reported.

Some pension funds are taking steps on their own to defuse their securities lending risks. Bill Atwood, executive director at the Illinois State Board of Investment, which has about $1.6 billion in State Street’s securities-lending program, is shifting those assets into a more conservative State Street collateral fund that invests in government securities or overnight corporate paper.

Meanwhile, Bank of New York Mellon has said it is taking an after-tax charge of $425 million in the third quarter to pay back clients for losses in several funds. The New York bank says clients are unable to withdraw fully from these accounts, but declined to elaborate.

Northern Trust, of Chicago, is taking a third-quarter after-tax charge of $94 million to pay back investors who lost money in its securities lending program.