SEC Sets Sights on Securities Lending

The Securities and Exchange Commission is concerned about the additional risk investment firms take on when they put cash collateral earned from securities lending into other uses, along with the lack of true transparency in the market. Thus, the SEC will conduct a “wholesale review” of the entire securities lending marketplace in a roundtable on Tuesday.

“Securities lending traditionally has been viewed by investors such as pension plans, endowments, foundations and mutual funds as a way to put otherwise dormant assets to use to earn a few extra basis points of return on a relatively risk-free basis,” SEC Chairman Mary Schapiro recently said.

“Events of last year, however, reveal that risk was very much present. Many lenders of securities lost money on the reinvestment of the cash collateral obtained from securities lending,” Schapiro added. “Without a central, public marketplace that displays quotes and prices, it is very difficult to assess the quality of a securities lending program or individual transaction.”

The Tuesday discussion will be followed on Wednesday with a second roundtable on possible new requirements for short selling.