Securities lending on the rise

Securities lending is back. And Australia's super funds, charged with looking after members' retirement savings, are in on the action.
By · 30 Sep 2013
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30 Sep 2013
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Securities lending is back. And Australia's super funds, charged with looking after members' retirement savings, are in on the action.

The controversial practice, in which stock is temporarily transferred from its owner to another party, is nowhere near the peak hit in the heady days before the global financial crisis. But Peter Martin, chairman of industry body the Australian Securities Lending Association, estimates the market to be worth a healthy $15billion to $25 billion a year.

"Would we like to see it back to $80 billion?" he said. "Absolutely."

The practice faded during the crisis after it was associated with short selling. But as risk appetite increases and sharemarkets rise, Mr Martin said volumes were strong as more institutions entered the market.

"A significant number of super funds that previously weren't lending or temporarily stopped have re-enrolled or chosen to proceed," he said.

Alex Dunnin, the director of research at Rainmaker, said bigger super funds lent stock to supplement their revenue. "It makes sense; there's nothing sinister about it, but there is a moral discussion about whether shorting is a bad thing," he said.

As the Australian Securities and Investments Commission has noted, securities lending "can ... occur ahead of, or as part of, short-selling activity".

Short selling is when hedge funds and other investors borrow shares they do not own and sell them in the hope their price will go down. If it does, they buy back the shares at the lower price, return them to their owner and pocket the difference.

For industry funds, which have roots in the union movement, facilitating short selling is contentious because the practice typically targets vulnerable companies, which in turn could speed up the prospect of job cuts or even corporate collapse.

The country's biggest super fund, the $65 billion AustralianSuper, has long been involved in securities lending. While the fund has yet to release its 2013 accounts, its 2012 accounts show that of $27billion in Australian and overseas shares plus global bonds, $1.14billion was being lent, up from about $830 million in 2011.

Similarly, industry fund Host Plus said it entered into scrip lending agreements for Australian and international equities and global bonds through 2012.

And the $23 billion construction and building industry fund Cbus allows its custodian to borrow domestic and international fixed interest securities and equities.

The Australian Council of Superannuation Investors, which advises super funds, said the "relatively common" practice among the funds was undertaken with a "range of protocols around the process, detailed in specific securities lending agreements with their custodians".

Paul Murphy, executive manager of institutional investments and policy at ACSI, said from a governance perspective it was "critical that shares are able to be recalled for voting purposes, otherwise there is a real risk that votes can be rented by another institution. This could prove material in a shareholder vote on a change of control."
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