Good morning.
Welcome to day one of the Securities and Exchange Commission's Securities Lending and Short Sale Roundtable. The Commission is grateful that so many have agreed to participate in today's meeting. I believe that I speak for my colleagues on the Commission in saying that we look forward to the panelists' comments, insights and recommendations on these two very important interconnected areas of the securities industry. Today’s focus will be securities lending.
Securities lending is the practice where an institution with a portfolio of investment securities temporarily lends out, on a collateralized basis, some of its portfolio securities that would otherwise be sitting idle. Securities lending has existed in some parts of the world since at least the 19th century, if not earlier. In the 1970s, securities lending increased in the U.S. as custodial banks lent out the portfolio securities of their custodial clients, and registered investment companies began lending their securities. In the 1990s and early 2000s, with the expansion of the global securities markets and investing, and the exponential increase in short selling and related strategies, the demand for securities lending also grew.
For a long time, securities lending was regarded and described as a relatively low risk venture, but the recent credit crisis revealed that it can be anything but low risk. This was particularly the case with cash collateral reinvestment programs which experienced unanticipated illiquidity and losses. Some institutions that lent their securities, and the beneficiaries relying on those institutions, were significantly harmed.
As a result, many questions have arisen with respect to the securities lending market and whether it may be improved for the benefit of market participants and investors. We hope to explore many of these important questions in today’s roundtable.
Throughout the day, we will hear from panelists on four different panels. Each panelist will take a few moments to share his or her thoughts on the issues being discussed, and when the opening statements are complete, the floor will be open to questions from the moderators and Commissioners.
The first panel will, in part, serve to provide an overview of securities lending, its participants and process — a “securities lending 101” if you will — to provide us with context for the ensuing panels. The panelists will describe the mechanics of securities lending, the major participants, its compensation structure, as well as the motivations for lending and borrowing securities. The panelists will also comment on the benefits and pitfalls of securities lending, given their recent and past experiences in the area.
The second panel will explore a number of topics relating to investor protection concerns, such as: cash collateral reinvestment and the problems that many lenders and lending agents experienced when the credit crisis hit; alternatives to cash collateral and lending practices that could perhaps have mitigated the recent experience; default risk; lending agent compensation and fee splits; and proxy voting issues.
The third panel will discuss the issue of “transparency” — what it is, whether it exists in the current securities lending marketplace, and whether steps need to be taken to improve it. We are interested in hearing about transparency related to the pricing of securities lending transactions, as well as transparency in any other area of securities lending that panelists may wish to discuss. The panel will also explore issues related to newly emerging electronic lending platforms; central counterparties, and issues of accountability.
The fourth and final panel of the day will discuss the future of securities lending — what are the factors that are likely to drive its future evolution and the risks going forward. In addition, the panel will assess whether there are any regulatory gaps in the marketplace; and, finally, what areas, if any, are in need of additional SEC action to enhance investor protection.
The panelists we will hear from today are leaders in their respective fields and represent a range of constituencies that includes: beneficial owner-lenders, agent lenders, borrowers, regulators, academics, consultants, academics, and others. We are truly privileged to have them
here, and we look forward to a spirited and substantive discussion.
I'll turn the meeting over now to Jamie Brigagliano, acting co-director of the Division of Trading and Markets who will introduce and moderate our first panel. Thank you.