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UCITS Funds May Stop Securities Lending, Says Expert

Written by Paul Amery

March 15, 2013 17:38 (CET)


Europe’s retail investment funds may shut down their securities lending programmes as a result of increasingly complex regulatory demands, said one panellist at Markit’s Securities Finance forum, held earlier this week in London.

New guidelines for UCITS and exchange-traded funds (ETFs), issued last year by Europe’s securities market regulator, ESMA, specify that fund management companies must declare the costs they incur when operating a securities lending programme, and that they must pass all securities lending revenues, net of those costs, back to the investors in funds lending securities.

Securities lending is widely used by the managers of ETFs to offset fund expenses and improve tracking performance.

However, the practice has been under increasing scrutiny since the financial crisis as global regulators crack down on so-called “shadow banking” undertaken by funds. Shadow banking in the funds sector encompasses activities like securities lending, repurchase (repo) and reverse repo agreements and, more broadly, any transactions involving a mismatch of a fund’s liquidity and its underlying assets, or a mismatch of maturities between the fund’s redemption policy and its investments.

More recently, investors in the US have also targeted lawsuits at the managers of funds involved in securities lending, claiming that they have not been receiving a fair share of the revenues generated by the practice, while retaining most or all of the risks.

According to John Arnesen, global head of agency lending at BNP Paribas Securities Services, the new regulatory requirements for UCITS funds may force fund managers to rethink their involvement in securities lending altogether.

“For years agent lenders have struggled to convince portfolio managers that securities lending might make sense,” said Arnesen, speaking at Markit’s forum.

“They’re going to see even less benefit now that the share of revenues they can retain has dropped. The debate over the pros and cons of lending might now shift to fund trustees, who may think it’s too much work to evaluate.”

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