According to a Dow Jones report, the agent lenders – who provide securities to broker-dealers for use in other transactions – call for them to provide detailed information about the principal holders of the securities, along with daily updates on the latest market developments.
In turn, broker-dealers would develop new processing systems to process the new data, track credit risk, and set aside appropriate capital. They wouldn’t be required to add to their official accounting, but they would be expected to keep their clients informed of risk trends, according to Dow Jones. For the new plan to work, broker-dealers will have to find automated ways to handle all the new data that will be generated.
The new plan is designed to track the risks that associated with securities lending transactions. In the past, broker-dealers have not been able to keep track of specific credit risk concentrations, making it difficult to watch for troubles like the ones that sank MJK Clearing. MJK’s collapse was largely the result of lending in a single stock, Genesis Intermedia Inc., that ran into trouble.
Industry scrutiny has increased since MJK went under, underscoring the need to improve disclosure and risk management, said Les Nelson, managing director at Goldman Sachs. “MJK is the white elephant in the room, and we’re going to deal with that today,” Nelson said. After its collapse, existing practices were “difficult for us to defend.”
Nelson announced the new proposal at a Bond Market Association conference Thursday. The plan will be a key step in addressing concerns from the US Securities and Exchange Commission and other regulators, he said.
The new plan was designed by the Industry Agent Lending Task Force, a joint effort of the Bond Market Association, the Risk Management Association and the Securities Industry Association
The SEC, the Federal Reserve and the New York Stock Exchange were all involved in the plan’s design. No major sticking points have emerged so far, and regulators expressed cautious optimism about the proposal.