Securities lending is the practice of lending plan assets to others in exchange for cash as collateral. The investment fund managers get to charge for lending the assets, and they also get to keep any earnings on the cash they invest.
The Senate Special Committee on Aging held a hearing on securities lending Wednesday to look at reports that problems with securities lenders’ efforts to invest the collateral had, in turn, interfered with the ability 401(k) plan participants to get cash out of their accounts during the recent financial crisis.
Lawmakers and others cited reports that plan participants sometimes had trouble getting to cash even when they had invested in what were regarded as highly conservative investments, such as money market funds and stable value funds.
Financial services industry witnesses at the hearing acknowledge that the financial crisis uncovered problems, but they suggested that the problems could be addressed with tweaking rather than major surgery.
Ed Blount, executive director of the Center for the Study of Financial Market Evolution, Washington, a longtime player in the securities lending community, said the “cash collateral lockups that froze the assets of 401(k) defined contribution accountholders” during the financial crisis is a problem for the entire investment community.
Managers of many different widely used investment vehicles, such as index funds, options and futures, often use borrowed securities to handle matters such as settling short positions.
Those activities increase the liquidity and efficiency of the U.S. capital markets, and restricting those transactions would increase the “risks of settlement failures and increasing the capital charges for brokers with customer segregation deficits,” Blount said, according to a written version of his testimony provided by the committee. “All this would erode the global competitiveness of U.S. domestic
capital markets and, ultimately, American business.”