Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Thursday, September 24, 2009

Stock lending on the rise again.

Stock lending – the process whereby long funds ‘lend’ (ie transfer temporarily) their shares to a third party normally a hedge fund – has started to hit the news again. It had dropped off almost completely since late last year, with the down sizing of the hedge fund industry being part of the problem.

According to a report by consultancy Finadium, loan volumes of US equities to January 2009 had fallen from $717bn in 2007 to $300bn. And almost 20% of lenders had given up the practice altogether, despite the fees it earned and collateral cash it created.

However there are signs that it is on the way back. Lenders are returning to the market, although some are lending only those stocks in most demand – earning higher fees – rather than general lending programmes for lower fees.

And the cost of lending can now be tracked by a new index created S&P Indices. They have introduced a new index series designed to track the average cost of borrowing U.S. equities.

In a heating up activist market, older concerns are also resurfacing, specifically “empty voting” – a term coined by Hu and Black at University of Texas to describe where an investor’s voting rights achieved through borrowing stock, is greater than its exposure to underlying performance.

Now Dr. Hu is reported to be about to be appointed by the SEC to a position overseeing risk assessment. Should we look to see an improvement in the disclosure of positions held by US institutions? Many argue for transparency of both voting decisions and the amount of stock voted by each institution. Only this way can we create accountability.


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