Pension funds to continue securities lending despite volatility, experts say
EUROPE - European pension funds - which largely kept up lending securities activities even after Lehman Brothers collapsed in 2008 - are unlikely to suspend their programmes due to recent market turbulence, consultants have said.
Experts conceded that some pension funds might suspend programmes temporarily in the face of volatility in the coming months, but no such case have yet been reported.
Kevin McNulty, chief executive at the International Securities Lending Association (ISLA), said: "After the fall of Lehman Brothers in 2008, pension funds took a step back and changed their risk guideline accordingly to better evaluate the risk.
"Those who decided to continue their securities lending programme therefore prioritised better liquid assets, as well as higher margins over collateralisation.
"As a result, their programmes are not seen at risk at the moment, and the worst-case scenario, which would see pension funds stop their activities in the field, is unlikely to happen."
If this scenario were to happen, however, the impact for the securities lending market would be damaging, putting more pressure on available liquidity and increasing market volatility, McNulty said.
Nonetheless, recent market turbulence has served to remind lenders the importance of accepting collateral that best matches their requirements and risk strategies.
Cees Blokzijl, director of the Dutch pension fund Royal Vopak, told IPE: "We decided after the turmoil in 2008 to suspend our securities lending programme due to a lack of transparency.
"This was simply part of our strategy to downgrade the risk taken, but we have not banned the option of going back to this market, and we might study the possibility to lend securities once the market has stabilised."
Blokzijl added: "The priority at this stage is to find stable collateral pension funds are willing to take. But the current market volatility makes it difficult to know what kind of assets are stable enough to be used as collateral.
"Furthermore, volatility makes excellent collateral management a necessity."
Pension funds, which have lent out their securities and taken cash or fixed-income securities as collateral, might therefore experience some losses.
The short-selling bans imposed last week by four European countries - Belgium, France, Spain and Italy - could also have an impact on lenders, McNulty said, as the demand for securities borrowing could jump.
He also warned that the bans would do nothing to root out market abuse, serving only to increase volatility and decrease liquidity.