Securities lending transactions: market development and implications - New report by IOSCO and CPSS
12 July 1999
The Technical Committee of the International Organization of Securities Commissions (IOSCO) and the Committee on Payment and Settlement Systems (CPSS) today release a joint report entitled Securities lending transactions: market development and implications.
It is the second joint report by IOSCO and the CPSS. The first, Disclosure framework for securities settlement systems, was published in 1997. The present report was prepared by a Working Group set up jointly by the two committees as part of their continuing cooperation on issues of mutual concern. The Working Group was composed of representatives of central banks and securities regulators in 16 jurisdictions.
What was the motivation for the report?
The growth in securities lending transactions has been such in recent years that they now represent a substantial part of the daily settlement value in many settlement systems and play an important role in facilitating market liquidity. In this context, the Working Group was mandated to "develop a clearer understanding of the development of securities lending and its implications for securities regulators and central banks, in particular its implications for securities clearance and settlement systems".
Securities lending is a generic term used in the report to refer to various types of transaction - securities loans, repurchase agreements (repos) and sell-buyback agreements - involving the temporary exchange of securities, generally for cash or other securities of at least an equivalent value, with an obligation to redeliver a like quantity of the same securities on a future date. These transactions are economically similar but differ in terms of their legal structure.
Input by market participants
Wendelin Hartmann, Chairman of the CPSS, and Michel Prada, Chairman of the Technical Committee of IOSCO, stressed the significant contributions made by market participants to the report: "As a key part of the project, central banks and securities regulators in each jurisdiction conducted a qualitative survey amongst market participants of the size and structure of their lending activities, and the factors that they felt were driving the market's growth. These market participants included broker-dealers, custodian banks, institutional lenders, banks, securities settlement systems, clearing houses, providers of market services and industry consultants. In total, the members of the working group interviewed more than 60 institutions in over a dozen countries worldwide."
What does the report address?
The report provides an overview of the dynamics of the securities lending market, including the underlying motivations for securities lending and legal, regulatory, tax and accounting issues. It also addresses the risks present in these transactions and the practices and procedures used by market participants to manage and reduce them. The report discusses a number of implications for market participants, infrastructure providers and market authorities, in particular securities regulators and central banks.
What are the major findings of the report?
- Securities lending markets are a vital component of today's domestic and international financial markets, providing liquidity and greater flexibility to securities, cash and derivatives markets
- As the scale and importance of securities lending increase, market participants should continue to develop sound practices to identify and control risks and ensure that these approaches keep pace with the market
- While securities lending has flourished within existing securities settlement systems, features unique to securities lending transactions require market infrastructure providers to consider the need for further automation and for tools to facilitate the processing of securities lending transactions
- Securities regulators and central banks share a common goal in encouraging sound practices in the securities lending markets, and should ensure that their own regulatory approaches support these practices
Commenting on the report's findings, Masayuki Tamagawa, Chairman of the joint Working Group, said: "We hope the report will stimulate a wider discussion and consideration of this important market."
The report is available on the BIS website (www.bis.org) and the IOSCO website (www.iosco.org) and copies can be obtained from the BIS, IOSCO or the national institutions represented in the Working Group from late July.
Notes to editors
1. The Committee on Payment and Settlement Systems (CPSS) serves as a forum for the central banks of the G10 countries to monitor and analyse developments in payment and settlement arrangements and to consider related policy issues. Non-G10 central banks are increasingly involved in the Committee's work. The Chairman of the CPSS is Wendelin Hartmann, member of the Directorate of the Deutsche Bundesbank. The CPSS Secretariat, headed by Gregor Heinrich, is hosted by the BIS. Previous CPSS publications include: Delivery versus payment in securities settlement systems (1992) and Cross-border securities settlements (1995). A list of CPSS publications as well as the full text of a number of recent reports in English are available on the BIS website.
2. The International Organization of Securities Commissions (IOSCO), based in Montreal, currently groups 164 securities market regulators which have resolved to cooperate to promote high standards of regulation in order to maintain efficient and sound domestic and international securities markets. The Secretary General of IOSCO is Peter Clark, and its Technical Committee (under whose auspices the report was produced) is chaired by Michel Prada, President of the Commission des Opérations de Bourse, France. IOSCO has published a number of reports concerning securities settlements, including Clearing and settlement in emerging markets - a blueprint (1992) and Cooperation between market authorities and default procedures (1996). Other IOSCO reports are listed on its website.
3. The Working Group was chaired by Masayuki Tamagawa, Director for International Affairs, Financial System Planning Bureau, Ministry of Finance, Japan. A list of the members of the group and the organisations they represent is contained in the report. The Secretary of the Working Group was Masayuki Mizuno of the CPSS Secretariat.