We thank the Financial Times for their article, “Securities lending unsettles regulators,” by Chris Flood. The article was published on Jan 10 2016 and highlights the importance of securities lending as a means of improving market liquidity. We were accurately quoted on our opinions but our data were misquoted in the original print and online editions (but have subsequently been corrected online).
Most importantly, as a counterbalance to Patrick Jenkins’ FT piece on securities lending from two weeks ago (“The FT suggests that collateral transformations amount to regulatory arbitrage“), yesterday’s article takes a more reasoned view of the benefits of securities lending. According to Mr. Flood:
“Some observers believe moves by regulators to impose stricter rules on securities lending could hurt returns to investors, reduce profits for asset managers and increase the risk of asset price bubbles developing in financial markets.”
Finadium got an accurate quote as well: “‘Securities loans play an integral part in reducing transaction costs, providing liquidity to financial markets and generating income for retirement plans and other long-term investors,’ says Mr Galper.” This plays off of our November 2015 research report, “Securities Lending, Market Liquidity and Retirement Savings: The Real World Impact,” freely available courtesy of State Street. (The full report can be downloaded here.)
Our data were miscited in the original print and online editions, which caused confusion, but have since been corrected online. We sent the FT average cumulative fund earnings over specific time periods, but this was written up as total fund earnings.
The article also called out some regulatory concerns about securities lending that we view as legitimate, including a lack of transparency on loans and what happens to cash collateral.
Overall, this article was much fairer than the surprising read from Mr. Jenkins that portrayed securities lending and collateral transformations as regulatory arbitrage by banks looking to hide their true balance sheet exposure. We appreciate the FT’s revisiting the subject.