Disclosure of Equities Securities Lending – February 2009 3. The Process to Date

The need to enhance the disclosure of securities lending was a central theme of the Reserve Bank's 2008 Review of Settlement Practices for Australian Equities, with industry participants generally acknowledging that the current arrangements needed to be improved. Further to the publication of this review, the Reserve Bank has consulted with a wide range of industry participants to develop a workable model of disclosure while, at the same time, ASIC and the Treasury have been developing complementary arrangements to improve the reporting and publication of data on short selling of equities.

Given the Reserve Bank's responsibility for stability of the settlement system and its relevant powers under the Act, the Payments System Board's view is that improved disclosure of securities lending can be facilitated by changes to the Financial Stability Standards. Reflecting this, the Reserve Bank released a Consultation Document on 24 October 2008 proposing a variation to the ‘Understanding Risks’ measure of the Financial Stability Standard for Securities Settlement Facilities. This variation would have the effect of requiring ASTC to collect, aggregate and publish information on equities securities-lending activity.

The Reserve Bank received seven submissions in response to the Consultation Document.[1] These submissions were generally supportive of the principle of disclosure and raised no objections to the proposal to enforce this via variation of the Financial Stability Standard. The submissions did, however, raise a number of practical issues that were discussed in industry roundtable meetings, hosted by the Reserve Bank, on 8 December 2008 and 27 January 2009. These meetings focused on the practicalities of establishing an improved disclosure regime, without imposing undue costs on ASX or market participants. In addition, the Reserve Bank met bilaterally with representatives of industry associations – the Australian Securities Lending Association (ASLA) and the Australian Custodial Services Association (ACSA) – and ASX.

In the Consultation Document, it was suggested that one possible way of implementing improved disclosure would be for securities-lending transactions to be ‘tagged’ in the settlement system, with different tags applying to different types of loan transactions (for example, new loans and borrows, and inward and outward loan returns). It was suggested that the tagged data – which would provide details on the flow of transactions – could then be used to construct a series on outstanding loan positions by security, which would be published. Although there was little objection to the principle of using the tagging of transactions as a basis for disclosure, a number of practical issues were raised both in respect of the implementation of a tagging regime and the use of the transaction-level data to construct data on aggregate outstanding positions. The main issues raised were:

  • Information flow: ACSA, responding on behalf of the custody industry, noted that custodians do not typically receive detailed information on a client's securities-lending activity. As such, if a tagging regime were part of the disclosure framework, it was strongly suggested that to avoid inaccurate reporting and potential mismatches in settlement instructions, only a single ‘loan-related’ tag should be used (rather than separate tags for loans, borrows, inward loan returns and outward loan returns).
  • Responsibility and enforcement: It was accepted that variation to the measures supporting the Financial Stability Standard would provide appropriate underpinning to changes to the ASTC Settlement Rules to give effect to this disclosure. There was, however, concern as to how settlement participants could impose a disclosure obligation on their clients (or their clients’ clients). Existing contractual arrangements would not cover such obligations.
  • The cost of system enhancements: Notwithstanding that ASX and third-party vendors were likely to be able to accommodate any required system changes at relatively low cost, there would likely be spillover to operational processes at the level of settlement participants, and beyond to participants’ clients. The full cost of this would not be estimable until the precise vehicle for disclosure had been agreed.
  • Time-frame for implementation: There was a general sense among respondents that the Reserve Bank's initially stated target for implementation (end-March 2009) would not be achievable and hence interim measures might be required. ASLA members also argued strongly that there should be a phased implementation, to allow sufficient lead-time to ensure that any data published were accurate and not open to misinterpretation.
  • Timing of publication: Members of ASLA argued strongly that public disclosure of outstanding on-loan positions should only occur with a lag, as changes driven by recalls could reveal information about a fund manager's intention to sell. Concerns were also raised about the frequency of publication of the data and, in particular, about the potential cost of producing data on a daily basis.
  • Data quality and form of publication: Some participants expressed concern that the data could be open to misinterpretation, particularly aggregated data that included ‘chains’ of loans. The accuracy of the data was deemed paramount and ASLA members, in particular, stressed that care should be taken to avoid misinterpretation. As such, any published data should be carefully controlled for quality and published alongside meaningful comparative statistics (such as the total number of shares committed to lending programmes). Issues were also raised about the coverage of the data and, in particular, whether offshore lending activity would be adequately captured.

With these comments in mind, the Reserve Bank has been examining how, in practice, securities lending disclosure could be implemented without imposing unnecessary costs on the industry. The next section discusses the possible approaches considered.


Submissions were received from the Australian Securities Exchange (ASX), the Australian Securities Lending Association (ASLA), the Australian Custodial Services Association (ACSA), the Australian Bankers’ Association (ABA), the Securities and Derivatives Industry Association (SDIA), Westpac Banking Corporation, and RiskMetrics Australia. These submissions are available at: <https://www.rba.gov.au/payments-system/clearing-settlement/submissions-received/disclosure-equities-submissions/>. [1]