United States

The US securities lending market had just over $621bn (£486bn) of lendable equities at the end of 2022 according to S&P Global Market Intelligence, up from the $576bn recorded in 2021.

In terms of value on loan, the 2022 total of almost $16 trillion was actually lower than the total for the previous 12 month period, although lending revenues rose from $3.5bn to almost $4.4bn between 2021 and 2022.

In November 2022, the Securities and Exchange Commission (SEC) adopted amendments to enhance the information mutual funds, exchange-traded funds, and certain other registered funds report about their proxy votes. The amendments make these funds’ proxy voting records more usable and easier to analyse, improving investors’ ability to monitor how their funds vote and compare different funds’ voting records.

The rulemaking also requires institutional investment managers to disclose how they voted on executive compensation.

For nearly 20 years, registered funds have been required to disclose their proxy voting records, but investors faced difficulties analysing these reports. For example, funds were not previously required to disclose votes in a consistent manner or in a format that is machine-readable.

To enhance proxy vote reporting, the amendments require funds and managers to categorise each matter by type and, where a form of proxy or proxy card subject to the SEC’s proxy rules is available, tie the description and order of voting matters to the issuer’s form of proxy to help investors identify votes of interest and compare voting records.

The changes also prescribe how funds and managers must organise their reports and require them to use a structured data language to make the filings easier to analyse. Funds and managers are required to disclose the number of shares that were voted or instructed to be voted, as well as the number of shares loaned and not recalled and thus not voted.

This latter requirement is designed to provide shareholders with context to understand how securities lending activities could affect a fund’s or manager’s proxy voting practices.

The new rules and form amendments are effective for votes occurring on or after 1 July 2023, with the first filings subject to the amendments due in 2024.

For decades the collateral markets have operated on a simple premise: collateral with short maturities from high quality issuers is preferable to collateral with longer maturities from issuers with lower credit quality. This assumption helped participants mitigate the risk that collateral would decrease in value by accepting collateral with short maturities from sovereign issuers with high creditworthiness.

As firms accept broader types of collateral, they seek to mitigate liquidity and credit risks with increased haircuts, more onerous eligibility criteria, and more frequent margining.

United States equities 2022 (US$)

However, Transcend’s Todd Hodgin observes that the recent stalemate on the US debt ceiling prompted at least a short term rethink of that basic notion.

The low credit risk of the US government, and the use of the dollar as the global reserve currency, have allowed US debt to be considered a ‘risk-free’ asset. From a credit risk perspective, the prevailing US Treasury rates are used as the risk-free rate for financial analysis and valuation of many assets.

Therefore, US Treasuries were often widely accepted as collateral under securities finance transactions, CCP exposures, and as bilateral derivative margins. Treasuries often enjoy the lowest haircuts under those contracts with few limits on the amount allowed as eligible collateral.

As the US approached the debt ceiling, where no additional borrowing would be allowed under current legislation, market participants began to plan for a variety of potential outcomes in the collateral markets.

One risk being discussed was what would happen to short term T-bills if there was uncertainty about whether the US could meet its short term obligations. Participants were game planning what would occur if counterparties instituted a brief pause in accepting T-bills, a downgrade of US debt lead to collateral becoming ineligible, or an increase in the haircut on that collateral was warranted.