Review of Settlement Practices for Australian Equities 5.4 Transparency and disclosure of securities lending

During discussions with industry participants there was a general recognition that transparency needs to be improved. There were, however, a variety of views as to the objectives of increased transparency and the scope of additional information to be disclosed.

Greater transparency might be expected to have a number of benefits. In particular, the publication of data on securities lending could:

• improve general understanding of the potential settlement risk inherent in securities lending positions. For example, observation of a large accumulated lending position in a stock relative to its market capitalisation or, perhaps more usefully, average daily turnover, might give some indication of the potential difficulty in covering a position to meet a stock recall in the event of a corporate action/event;
• help ensure that all participants in the market have access to data on the volume and value of securities lending, rather than just those directly involved in such transactions;
• assist in ‘ex post’ analysis of market events, and thus help understand the functioning of markets. Such data could, for example, allow analysis of the relationship between sizeable market moves and changes in securities lending activity (either new loans or recalls). The data could also assist in separately tracking the settlement fails rate on securities lending transactions. Over time, such analysis might lead to a better understanding of the way the market functions, improving its overall efficiency; and
• serve as a proxy for short selling. While there are clearly limitations on the usefulness of data on securities lending for this purpose, these data may assist in some cases. Some estimates suggest that around 50 per cent of activity in the securities lending market is related to short selling.

Improving the transparency of securities lending activity, however, faces a number of practical challenges, both in terms of operational arrangements and enforcement. One possibility might be to tag data at the trade capture stage within CHESS, requiring that the lender (or both the borrower and the lender) populate a field to denote that the trade is related to a securities loan. If this were done, it would be useful to separately identify whether the trade was a new loan, a loan return or a loan recall. One possibility is that such arrangements could be enforced by ASX in the context of the participant's adherence to operating rules.

The Bank encourages the development of arrangements for improved transparency of securities lending that will promote the efficiency, stability and integrity of the Australian financial markets.