Now a focus on stock lending.
The genie truly is out of the bottle. As regulators all over the world come to terms with whether to ban short selling, or whether to require disclosure, and if so how, a new enquiry is underway.
Stock lending has a distinguished history of helping in various market situations. Lost certificates, dividend arbitrage, hedging and many other legitimate tactics have underpinned the returns to long investors.
However, as part of the moves to enhance transparency in equity derivatives, regulators (including in the UK), are starting to enquire quietly about its processes.
Do all participants fully understand it and its consequences? Are institutions always aware of the levels of lending in their assets? And do they factor the impact of the use of “their” stock in equity derivatives on the market price of the securities?
To what extent do lenders assess risk, such as potential delays in settlement, in risk models? And what is the potential for so called ‘empty voting’ – where the stock is borrowed before a vote, the proxy exercised – and the stock returned immediately afterwards? This potentially runs counter to the long term investment strategy of the lender.
These and other stock lending questions are surfacing in regulatory circles at the moment: can a full consultation on today’s model of ‘aggregated’ disclosure in stock lending far behind?
And market participants will want to know when the genie of requiring disclosure of synthetics will be stuffed back in the bottle.
Stock lending has a distinguished history of helping in various market situations. Lost certificates, dividend arbitrage, hedging and many other legitimate tactics have underpinned the returns to long investors.
However, as part of the moves to enhance transparency in equity derivatives, regulators (including in the UK), are starting to enquire quietly about its processes.
Do all participants fully understand it and its consequences? Are institutions always aware of the levels of lending in their assets? And do they factor the impact of the use of “their” stock in equity derivatives on the market price of the securities?
To what extent do lenders assess risk, such as potential delays in settlement, in risk models? And what is the potential for so called ‘empty voting’ – where the stock is borrowed before a vote, the proxy exercised – and the stock returned immediately afterwards? This potentially runs counter to the long term investment strategy of the lender.
These and other stock lending questions are surfacing in regulatory circles at the moment: can a full consultation on today’s model of ‘aggregated’ disclosure in stock lending far behind?
And market participants will want to know when the genie of requiring disclosure of synthetics will be stuffed back in the bottle.
posted by Mark Hynes @ 1:10 pm
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