Konstantinova K.V., Moiseieva F.A.

Donetsk National  University of Economics and Trade named after Mykhailo Tugan-Baranovsky

Short History of Securities Lending

Securities lending began with the development of securities trading markets. For example, in the UK market from the 19th century, specialist intermediaries sourced gilts for the jobbers or market makers. Collateral, typically non-cash, passed between the parties at the end of the trading day and offered protection for the lenders. A two-tier market soon developed. There was a security specific or “special” market and a more generic financing or “general” market. Much of the borrowing facilitated a practice called “bond washing,“ whereby tax advantages were exchanged

between parties around record and ex-dividend dates. This was the precursor of tax arbitrage.

The 1960s

As the UK and US securities trading markets developed, so too did the securities lending markets. Here are some of the key developments from the 1960s:

· The first formal equity lending transactions took place in the City of London.

· An active inter-dealer market developed in the US (back office to back office).

· The increase in general, and particularly block, trading volume in the US equity markets, but with the settlement system remaining based on paper shares certificates, led to large backlogs of settlement fails with back offices borrowing securities for settlement cover,

· US Treasury bond financing expanded– hitherto the US market had focused on equities, etc.

The 1970s

In the 1970s the US market developed and assumed much of the shape that would be recognized today. The UK market would not develop a recognizable form until deregulation following Big Bang in the 1980s. Here are some of the key developments from the 1970s:

· The Depository Trust Company (DTC) reduced settlement related demand but facilitated an increase rise in trading activity.

· Trading demand from arbitrageurs increased. Strategies included:

· Convertible bond arbitrage.

· Tax Arbitrage.

· Initial Public Offering (IPO)-related trading.

· The US custodian banks began to lend securities on behalf of their clients: endowments, insurance Companies, pension Funds.

Treasury dealers began ‘matched book’ repo trading – generating borrowing demand and the creation of “finders” - specialists that lacked capital but had significant relationships and could find the securities that you needed.

The 1980s

Key developments included:

· International and cross border securities lending grew rapidly, driven partly by the

international expansion of the US broker dealers and custodian banks.

· Institutional lending of overseas securities increased because US and UK lenders were willing to expand their programmes from being domestic only.

· Increases in the debt of most G10 governments encouraged the growth of government bond lending and repo markets.

· Trading demand continued to grow, driven by a variety of strategies.

On May 17 1982, Drysdale Securities, a minor bond dealer, collapsed. Drysdale had over $2 billion in US Treasury loans outstanding when it defaulted. Institutional supply temporarily dried up following the Drysdale affair, particularly via the custodians, due to legal uncertainties The US Government Securities Act of 1986 followed and other changes included the BMA developing a standard contract, specification of collateral margins, collateralization of accrued interest and disclosure of borrowers and lenders by custodian banks.In the autumn of 1988 Robert Maxwell authorized securities lending transactions from the Mirror Group Newspaper pension fund. It was not until after his death on 5th November 1991 that the consequences of these and subsequent transactions became apparent to the authorities, the market and the pensioners as the Department of Trade and Industry.

The 1990s

Securities lending volumes again increased sharply in most markets throughout the decade. Key developments included:

· Growing demand to borrow securities to support hedging and trading strategies:

· Technological advances, including computer processing power, access to real time price information and automated trade execution made possible new trading strategies, such as statistical arbitrage.

· Further rapid growth in hedge fund assets under management, despite a pause

following the collapse of Long Term Capital Management in 1999.

There is the removal of many regulatory, tax and structural barriers to securities lending throughout the world. Some of the major changes and developments in the repo market were driven by the removal of specific legal or regulatory barriers e.g.: 1993 French repo, and 1996 Japanese repo, 1996 UK repo, 1997 Italian buy-sell back, 1998 Swiss repo.

2000 and beyond

Trends include:

· The market becoming more segmented.

· Outsourcing developing e.g. third party securities lending agents.

· Tax arbitrage opportunities disappearing as tax harmonization occurs.

Continuing deregulation and tax changes makes possible the establishment of new

securities lending markets e.g. in Brazil, India, Korea, Taiwan. Equity repo - much more accepted and widespread than in 1990s.

Thus securities lending is on process of its development.

Literature:

1. Волощин І. Аналіз грошових потоків комерційного банку // Вісник НБУ. – 2003. №2. – С. 46-49.

2. Лаврушин О.И. Управление деятельностью коммерческого банка. – Москва: Юрист, 2005. – 688 с.

3. Парасій-Вергуненко І. Організація управлінського обліку в банках. Деякі аспекти теорії і практики // Вісник НБУ. – 2004. - №10. – C. 26-29.