Securities Lending Industry Articles

From time to time ASLA will publish industry related articles we think may be of interest to you.

An Introduction to Securities Lending (Australia)

This is the Australian adaptation of “An Introduction to Securities Lending”, focused on the United Kingdom market, written by Mark C. Faulkner, managing director and co-founder of Spitalfields Advisors Limited,© Mark C. Faulkner, 2004.

The Australian adaptation was prepared by John C King of Mallesons Stephen Jaques

An Introduction to Securities Lending (Australia) (Full Version) (Opens in a new window)

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An Introduction to Securities Lending (Australia)

Both domestic and more recently cross border securities lending is a well established business transaction in most developed international securities markets.

Parts 1-4 of this paper apply generally to the lending of both equity and debt securities, the principal focus of this paper is on the lending by an institutional investor of its Australian equity securities, which typically must be executed in Australia.

Securities Lending of Equity Securities in Australia (Abbr Version) (Opens in a new window)

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ASIC update re: CP319 and Class Order 11/272

30 Sept 2021

The Australian Securities Lending Association (ASLA) notes that following Consultation Paper 319 Securities lending by agents and substantial holding disclosure (CP 319), ASIC has  released ASIC Corporations (Securities Lending and Substantial Holding Information) Instrument 2021/821 (the ASIC Instrument): https://www.legislation.gov.au/Details/F2021L01333.

ASLA represents a number of agent lenders.  Agent lenders do not themselves engage in securities lending as principal, but rather play a valuable role in adding liquidity to the Australian securities lending market by bringing together large holders of securities with borrowers of securities.

The ASIC Instrument will affect how the “substantial holding” provisions in the Corporations Act apply to agent lenders.  ASLA sets out below a high level summary of the potential implications of the ASIC Instrument, which may impact on the broader market.

The main substantive change under the ASIC Instrument is the insertion of notional subsections 609(10C) and 609(10D) into the Corporations Act 2001 (Cth) (Corporations Act).  The effect of these changes is that an agent lender will generally not acquire a “relevant interest” in securities made available for loan by the underlying lender via the agent lender at the time of entry into an agent lending agreement (referred to in the ASIC Instrument as the authorisation agreement), but rather at the time at which the agent lender actually exercises its lending authority in respect of the securities and lends them (on the underlying lender’s behalf) to a borrower.

The impact of this is that agent lenders may be required to make or update substantial holding disclosure as a result of transactions between underlying borrowers and lenders (depending upon whether the agent lender, together with its associates, has “relevant interests” in the underlying securities in excess of the 5% disclosure threshold).  This may occur in circumstances where the underlying transaction is not itself disclosed by the underlying lender or the borrower (if, for example, neither the lender nor the borrower meet the 5% threshold).

As such, the market should be aware that future disclosure of substantial holdings by agent lenders may arise as a result of the ASIC Instrument, as opposed to any changes in market practice.  This may occur in circumstances where the agent lender has no economic interest in the relevant securities in respect of which it makes disclosure.  For example:

• In the case of lending pool securities, an agent lender obtains a relevant interest and is required to comply with the disclosure obligations at the time at which the agent lender actually exercises its lending authority in respect of the securities (subject to certain conditions being satisfied). That is, an agent lender may report a relevant interest as a result of a loan taking place between an underlying principal lender, and a third party borrower.
• In the case of securities delivered by the borrower as collateral (collateral securities), an agent lender obtains a relevant interest and may report a relevant interest in securities which are received as collateral for a loan entered into by the underlying principal lender and a third party borrower.

There are also other more minor changes made under the ASIC Instrument, which:

• grant relief from the requirement to disclose underlying agreements, provided a summary of key terms is made; and
• exempt an agent lender from disclosing the “consideration” for the relevant transactions (as securities lending transactions, being economically equivalent to a collateralised loan of securities, do not involve an equivalent of a “purchase price”).

Please contact your Agent Lender if you have any questions regarding the above.