RMA's Committee on Securities Lending Statement regarding the temporary prohibition on new short positions in certain financial shares.
Philadelphia, PA (September 25, 2008)
The Risk Management Association’s Committee on Securities Lending understands the necessity of the actions taken by the U.S. Securities and Exchange Commission (the “SEC”) and the United Kingdom’s Financial Services Authority (the “FSA”) to temporarily prohibit the creation of new net short positions in financial shares to protect the integrity of the markets and prevent further market dislocation. As noted by the SEC, these actions were taken on a temporary basis to ensure that, in turbulent market conditions, "unnecessary or artificial price movements" were not exacerbated by "naked" short selling. As other securities regulators around the world consider taking similar actions, we urge that any such actions: (1) be temporary; (2) be focused on those financial securities that are of concern; and (3) do not apply to or affect existing short positions. Of most concern is any regulatory action that would require existing short positions to be closed out, securities loans to be recalled, or lenders to stop lending securities. In our view, such regulatory action would only increase the current market turmoil by reducing market liquidity and triggering large-scale redemptions from both public and private investment funds.
In addition, given the vital role played by securities lending in the promotion of orderly, liquid markets, we urge lenders to continue to lend securities, including securities of financial companies. This is especially important in light of current market conditions. The volume of securities transactions has increased significantly as lenders sell collateral securities and purchase replacement securities. Decreasing liquidity in the securities market could lead to an increase in market fails.
Notably, the recent regulatory actions did not target securities lending, a reflection of the importance of securities lending to the maintenance of an orderly and efficient market. Specifically, securities lending provides a vital source of liquidity to equity, bond, and money markets, reducing the cost of trading and settlement and benefiting all market participants. In addition, the FSA and the SEC both exempted certain market segments, including market makers, market makers engaging in hedging activity related to derivatives, and block positioners, from the temporary restrictions on short sale orders. Securities lending facilitates these transactions and assists with the provision of liquidity for customers in the cash equity and derivatives markets. In sum, securities lending continues to play an essential role in maintaining the efficiency of the global markets.
We are encouraged by the response of securities lenders and again urge lenders to continue to lend and to maintain their on-loan positions as appropriate in light of their respective goals. We will continue to work with industry regulators and participants to address any issues arising from the current market environment.
Finally, we welcome the reiteration by the FSA that, in normal market conditions, short selling is a legitimate and valuable investment technique.
ABOUT RMA and the COMMITTEE ON SECURITIES LENDING
Founded in 1914, The Risk Management Association is a not-for-profit, member-driven professional association whose sole purpose is to advance the use of sound risk principles in the financial services industry. RMA promotes an enterprise approach to risk management that focuses on credit risk, market risk, and operational risk.
Headquartered in Philadelphia, Pennsylvania, RMA has 3,000 institutional members that include banks of all sizes as well as nonbank financial institutions. They are represented in the Association by 20,000 risk management professionals who are chapter members in financial centers throughout North America, Europe, and Asia/Pacific. RMA's Committee on Securities Lending was formed in 1983. The objective of the committee is to promote sound securities lending practices within its members and the industry.
For questions concerning this statement, please contact Mike McAuley, Chair, RMA Committee on Securities Lending, 617-664-2462, or Curtis Knight, RMA Director of Securities Lending, 215-446-4082.
Contact:
Meg McBride
RMA Public Relations
215-446-4110