Clarifications on the Bank of England positions on securities lending

On March 13 2012 we published an article citing Paul Tucker, the Bank of England Deputy Governor, speaking at the Association of British Insurers. Our article was based on a summary from the Financial Times; we had a number of questions and concerns about what was reportedly said. A friendly nudge pushed us towards the text of Mr. Tucker’s speech on the Bank of England’s website, and this has caused us to change our opinions on some important matters. While not all of our questions were answered (and more were raised), we wanted to set the record straight on our previous comments.

First, the text of Mr. Tucker’s speech makes clear his support for securities lending as a market function:

“Securities lending is essential for any capital market to work efficiently. Liquidity requires market makers or traders who willingly incur short positions to meet buyers‟ orders. They will do so only if they can cover their short positions – meaning that they need to be able to borrow securities to deliver into their sold positions. That in turn requires investors in those securities to be willing to lend them… nothing must be done to jeopardise the essential functions of securities lending.”

Second, we noted our concern about whether securities lending was being categorized by Mr. Tucker as part of Shadow Banking or not. The FT article suggested it was a maybe. The text of the speech leans in this direction but it would be good for the Bank to further clarify its official position in advance of the EU’s Shadow Banking conference on April 27 (where Mr. Tucker is speaking).

Third, the FT article cited Mr. Tucker as saying that securities lending was responsible for AIG’s downfall. Here, the FT got it plain wrong, and shame on us for continuing to retell their version of the story. With apologies to Mr. Tucker, the text of the speech clearly says that “AIG blew up when its stock-lending shadow bank – an insurance company – suffered a run.” The run led to a need to liquidate risky cash collateral investments and AIG was unable. Mr. Tucker got the story right. The FT did not, and we are guilty by association.

Fourth, we hold to our position that more disclosure from the Bank of England on the Trade Repository idea brought up by Mr. Tucker would be useful. If not a CCP, what would this Trade Repository look like?

The speech also brought up some other questions, for example if the UK has a definition of transparency that it means to advocate in the securities lending markets. This is a priority issue and one that vexes regulators (and market participants) worldwide. Just look at the trouble this one word has caused in Dodd-Frank Section 984.

Our thanks to the friend who pointed out our error, and again our apologies to Mr. Tucker.

The text of Paul Tucker’s speech is here.

A link to the faulty FT article is here.

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