Watson Wyatt Australia has advised clients to suspend securities lending activity if they have any doubts about the lending guidelines and arrangements with their lending agent.
The global consulting firm asserts that the risk/reward trade-off around this activity has changed, and in some instances may no longer be worthwhile.
The firm identifies counterparty risk, collateral and indemnification as the three key areas an institutional fund should focus on, when their securities lending programme is being run on an agency basis by the fund's lending agent, usually their custodian.
Recent market events have had a substantial impact on securities lending practitioners and their clients, Watson Wyatt Australia head of strategy Tim Unger said.
"It is imperative that institutional funds review their lending arrangements to ensure they fully understand the risks involved, and confirm their lending guidelines are appropriate," he said.
"We recommend that funds first research collateral types and amounts as well as their reinvestment guidelines, particularly where cash collateral is taken.
"Then they should investigate counterparty restrictions and any collateral indemnification provisions provided by lending agents.
"Having done this, if the risk relative to the reward is found to be unacceptable, they should immediately suspend securities lending where possible or initiate a gradual withdrawal," Unger said.
