A roundup of important securities finance news from the last few days, including updates on securities lending lawsuits; the Financial Stability Board’s final policy recommendations on securities lending and repo; reviews of the Fed’s briefly mentioned reverse repo facility, and a release from six US agencies on risk management in securitization.
Securities lending lawsuits: a judge dismissed a lawsuit against iShares/BlackRock for charging high securities lending fees. The suit was brought by two pension plans. The merits of the lawsuit were pretty questionable as we discussed in this post. In the end, the cause of dismissal was that securities law does not allow investors to sue over high fees. Presumably this is something that should have been understood and negotiated in advance.
On a related note, earlier this month Wells Fargo also won a case against Blue Cross Blue Shield of Minnesota and a few other investors, where BCBS wanted compensation for cash collateral reinvestments that lost money. This is one of those Prudent Man standard cases where the question is whether an agent lender acted prudently in reinvesting cash collateral. While losses certainly did occur, the judge’s finding in this case was that Wells Fargo did act prudently.
The Financial Stability Board: has released their expected policy framework on securities lending and repo. The industry has seen most of this before and the document, released today, needs a better read before we come to any conclusions. In the meanwhile, we point out recommendation 10 as one to generate discussion: “Authorities should evaluate, with a view to mitigating systemic risks, the costs and benefits of proposals to introduce CCPs in their inter-dealer repo markets where CCPs do not exist. Where CCPs exist, authorities should consider the pros and cons of broadening participation, in particular of important funding providers in the repo market.”
The Federal Reserve’s reverse repo facility: the FT had a couple of good articles on the the Federal Reserve’s reverse repo facility and what it could mean. The more entertaining of the two is “Will this be the ZLB/repo/collateral-scarcity solution we’ve been waiting for?” by Cardiff Garcia. It is a good discussion about what financial policy impacts the new facility might have. Here is the punchline: “So this might be a very big deal for certain parts of the financial system. Or it might be a helpful technical fix to better control rates. Or it might be nothing, in which case reading this post was a tremendous waste of time.”
A related FT article, “Fed considers new repo tool to smooth policy exit,” covers the main points as well.
Securitization rules: six US federal agencies yesterday officially revised securitized product risk retention rules to lighten the burden on issues – another good example of the pendulum swinging back towards a bit more relaxation on risk in financial markets. According to a Financial Reserve press release, “The original proposal generally measured compliance with the risk retention requirements based on the par value of securities issued in a securitization transaction and included a so-called premium capture provision. The agencies are now proposing that risk retention generally be based on fair value measurements without a premium capture provision.” This can be argued as a technical change, but we are now in the weeds of technicalities – this is where financial markets will get more or less liquidity as specific provisions of Dodd-Frank, Basel III, EMIR and other big name regs get ironed out.