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SEC reviewing equity collateral rules for US sec lending

01 February 2017

Longstanding regulatory barriers have prevented US market participants from using equities as collateral

Read more: equities collateral

SEC officials are reconsidering rules which prevent institutional market participants from pledging and accepting equities as collateral in the US securities lending market.

Stocks have long been recognised as an acceptable form of collateral for years in European and Canadian markets. However, longstanding legal and regulatory barriers have barred US market participants from doing the same.

Speaking at the IMN Securities Finance conference in Florida this week, Theresa Hajost, special counsel at the SEC’s Division of Trading and Markets, said the agency is "working through" scenarios where such trades could take place, adding it was an "ongoing process".

US securities lending industry groups, including the RMA, have previously urged the watchdog to consider a "coordinated approach" that would allow institutional participants in the US securities lending market to pledge and accept equities as collateral. 

The trade body believes that such a change would benefit all market participants and help to reduce systemic risk in both normal and stressed environments. 

It has also suggested that a move towards equity collateral would improve market liquidity, reduce borrowing costs for broker dealers and provide beneficial owners and agent lenders with another tool to manage risk in their lending programs. 

Others in the industry, including major agent lenders, have previously pointed out that the acceptance of correlated collateral, particularly equities against equity collateral, enables beneficial owners to benefit from increased utilisations and spreads. 

Speaking on the same panel as Hajost at the IMN this week, Andrea Aguiar, Morgan Stanley's executive director of bank resource management, added: "The rise of collateral trading techniques to optimise balance sheet usage supports the idea of using equities as collateral."

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