National regulator the Australian Securities and Investment Commission (ASIC) has issued new guidance designed to improve the disclosure regime for securities lending to promote an “efficient, competitive and informed market in quoted securities”.
Under the guidance paper issued by Australia's national regulator, those involved in securities lending and borrowing will be required to disclose any substantial holdings in listed entities, defined as an interest of 5% of a firm's stock. The rules will also apply to prime brokers, who may have ongoing lending agreements in place with their customers.
Securities lending is defined as a transaction where securities are transferred from their holder to a borrower. In most cases, the two parties would agree a securities lending agreement, requiring the borrower to post collateral. The borrower is obliged to return the securities either on demand or at the end of the loan term. Securities lending is often used as part of the short-selling process but may also cover failed trades, dividend-driven transactions or other transactions relating to corporate actions, including voting.
According to ASIC, disclosure of substantial holdings is important so that the market has transparency on: the volume of a company's securities that are subject to these activities; whether the level of stock that is out for lending could affect the control of a company; and the volume of securities that may be thought to be locked up in investment funds, but are actually at large in the market.
“Without appropriate disclosure, there is a risk that the market will be misled about the ownership and control of listed entities,” read the ASIC guidance.
Substantial holding disclosure would be considered distinct from any transaction specific reporting, such as for short selling, and disclosure would be required even if the lending is temporary and the borrower no longer has a substantial holding by the time it publishes an initial notice.