Regulators To Examine Securities Lending

“Some insurers engaged in securities lending activity have experienced significant losses in the last 6 to twelve months,” New York officials wrote in a circular letter issued in July. “Specifically, cash received as collateral was reinvested into securities whose value has significantly declined. As we see increased volumes in securities lending activity, we are concerned that some insurers may not be maintaining adequate collateral and effectively managing the risks associated with the securities lending function.

“Insurers engaged in securities lending should ensure that they have identified all risks and have controls in place to manage those risks. The Department will place more emphasis on securities lending activity by evaluating how well insurers are managing these risks in upcoming examinations and inquiries.”

Insurers have been lending bonds and other securities and using the cash received to make other investments, Neustadt says.

In the case of American International Group Inc., New York, the Federal Reserve Board has agreed to step in and take the place of the third party borrowing the securities if the third party does not have the liquidity to provide cash collateral.