Disclosure of Equities Securities Lending – February 2009 2. The Reserve Bank's Regulatory Responsibilities and Disclosure

The Reserve Bank's regulatory responsibilities in respect of clearing and settlement facilities are set out in the Corporations Act 2001 (the Act). Under the Act, licensed clearing and settlement facilities are required to comply, on a continuous basis, with any standards set by the Reserve Bank with respect to financial system stability and are also obliged to do all other things necessary to reduce systemic risk. In accordance with provisions in the Act, the Reserve Bank has determined Financial Stability Standards for both central counterparties and securities settlement facilities.[1] Each standard is supported by a set of minimum measures that the Reserve Bank considers relevant in determining whether a licensee has met the relevant standard. The Reserve Bank carries out, on an annual basis, a formal assessment of how well licensed facilities are complying with these obligations, reporting its findings to the Minister with portfolio responsibility for financial markets and to ASIC. These assessments are also released publicly.[2]

Four licensed clearing and settlement facilities are currently subject to assessment against the Financial Stability Standards: ACH; SFE Clearing Corporation (SFECC); ASTC; and Austraclear. Although each facility is separately licensed, all four facilities are part of a single corporate group, ASX.

Among other requirements, the standard applying to securities settlement facilities and associated measures require a securities settlement facility to make sufficient information available to participants, such that they are able to gauge the risks they may face through their participation in the facility. In its review of settlement practices, the Reserve Bank concluded that greater transparency of equities securities-lending activity could go some way to improving the information available to participants to assess vulnerability to settlement risks arising from activity in this market. Greater visibility of securities-lending transactions would also assist the system operator itself in its day-to-day management of risks arising in the batch settlement process.

In addition, since a high proportion of securities-lending transactions are motivated by the need to cover short-sold positions, disclosure of securities lending could complement short-selling disclosure, in respect of which ASIC and the Treasury have been working on reforms. In its review of settlement practices, the Reserve Bank concluded that securities lending and short selling support the efficient functioning of the equity market in normal market circumstances. Both practices add to market liquidity and to the efficiency of pricing, contributing to lower bid-offer spreads and helping to ensure that prices reflect the views of both bullish and bearish investors. As illustrated by recent experience, however, a lack of transparency in these activities can undermine confidence in the functioning of the market during periods of turbulence. Improved disclosure of securities lending could assist in addressing this issue.

Reflecting these considerations, the Reserve Bank highlighted in its Consultation Document a number of specific advantages from improved disclosure of equities securities lending. These include:

  1. assisting the system operator (ASTC) in managing the daily settlement batch, and in particular supporting back-out and batch-recalculation procedures should these need to be invoked;
  2. assisting in the analysis of settlement fails;
  3. providing sufficient information to market participants to enable them to assess potential future settlement risks, perhaps arising from the large-scale recall of securities loans;
  4. improving general understanding of the role of securities lending in the smooth functioning of equities markets;
  5. addressing imbalances in the availability of market information to participants; and
  6. complementing disclosure of the gross flow of covered short sales, currently required under an ASIC Class Order.

Obtaining some of the advantages from improved disclosure is dependent upon the availability of data on the flow of securities-lending transactions, while obtaining others requires data on the stock of securities loans outstanding. In particular, since (i) and (ii) rely on the system operator being able to identify which settlement instructions relate to securities-lending transactions, information at the transaction level is required. For (iii) to (vi), on the other hand, data on the aggregate stock of outstanding on-loan positions would likely be sufficient.

An important distinction here is between aggregate stock data including on-lending activity and that excluding such activity. On-lending refers to instances in which the initial lender (typically a fund manager) lends to an intermediary, who in turn lends to the end-borrower. The presence of such ‘chains’ of loans was an important issue in relation to the settlement disruptions of January 2008. Therefore, if the data are to help gauge potential future settlement risks, it is necessary that the data include on-lending activity. In contrast, the data should exclude on-lending activity (so as not to ‘double count’) if they are to usefully complement disclosure of short sales.


The Standards are available at: <https://www.rba.gov.au/payments-system/clearing-settlement/standards/> [1]

The assessment for the 12 months ending 30 June 2008 is available at: <https://www.rba.gov.au/payments-system/clearing-settlement/assessments/2007-2008/pdf/report-2007-2008.pdf> [2]