Consultation on Variation of the Financial Stability Standard for Securities Settlement Facilities: Disclosure of Equities Securities Lending 4. Practical Considerations

The effect of the proposed variation is that ASX would be required to make arrangements to facilitate the disclosure of securities lending, relying on its Settlement Rules to enforce this obligation on its settlement participants. Under Section 822B of the Corporations Act, these rules have effect as a contract under seal between ASTC and each of its participants, and between each participant and each other participant.

The Reserve Bank and ASX will continue to consult directly with market participants and vendor service providers to establish the technical details of implementation of this disclosure requirement. One mechanism for such disclosure is the activation of a matching field in the securities settlement system, Clearing House Electronic Sub-register System (CHESS), which could be used to identify whether a settlement instruction entered into the system is related to a securities loan – either a new loan or a loan return. The data could then be aggregated, stock-by-stock, across participants to produce a net daily flow by stock, which could in turn be added to, or subtracted from, the previous day's outstanding on-loan position. This could be published daily in a table alongside other relevant metrics, such as market capitalisation and average daily turnover.^[1]

The Reserve Bank understands that a currently redundant field in CHESS could be applied for this purpose. This field had previously been applied for a similar purpose when securities loan-related transactions were separately identified so as to attract an exemption from stamp duty. Preliminary consultation with ASX, market participants and software vendors suggests that it would not be particularly costly to reactivate such a field and to modify systems and operational processes to populate it. Indeed, the Reserve Bank understands that some participants’ systems continue to populate this field. Some challenges have been identified, however, most notably in respect of the flow of information from offshore borrowers and lenders to onshore brokers and sub-custodians.

If this approach were to be adopted, it would be necessary to take a snapshot of the initial outstanding on-loan position to provide a starting point for such a series. This could be achieved via direct reporting by participants engaged in lending activity. Furthermore, given that any gaps in daily reporting could lead, over time, to deviation of the calculated on-loan position from the ‘actual’ position, participants might also be requested to directly report an updated on-loan position periodically, perhaps on a semi-annual basis.

Internalised securities-lending activity would not be captured by such arrangements, but to the extent that these do not give rise to settlement risks, this should not undermine the primary objectives of the disclosure detailed above. It might, however, limit the applicability of the dataset to other more broadly scoped analysis of market functioning.

To improve the quality of the dataset, it would be useful to distinguish between initial loans from established lending programmes and loans extended by intermediaries. This might be achieved by separately aggregating across positions by reference to the identity of the lending party. Separate identification of intermediary lending would, as noted in Section 2, assist in analysing potential risks and dependencies arising from ‘chains’ of loans.

The Reserve Bank sees a strong case for this disclosure requirement to be implemented as soon as possible – certainly by the end of the first quarter of 2009. Should operational and technical constraints prevent full implementation of a system-based solution on this time-frame, the Reserve Bank would expect the disclosure requirement to be satisfied by an interim direct-reporting alternative.

Footnote

Euroclear UK and Ireland currently collects and disseminates data on securities lending, presenting the aggregate on-loan position in each security alongside the outstanding number of that security held in the depository. The full dataset is made available to market participants on a subscription basis, with a 3‑day lag. Average monthly data are available without subscription. [1]