Sec Speeches Cryptocurrency Shining a Light on Securities Lending

Securities lending plays an important role in our capital markets. It facilitates market-making, trade settlement, and price discovery. Market participants depend on it to meet short-term liquidity needs. But the lack of transparency in this market can also contribute to systemic risk.

During the 2008 financial crisis, securities lending was one factor that drove instability in global financial markets. Certain lenders used cash collateral received from borrowers in securities lending transactions to purchase mortgage-related assets. When the mortgage market collapsed these lenders experienced substantial losses on these assets.

While calculated risks sometimes result in losses – that’s how markets work – the lack of comprehensive data on securities lending activity while a financial crisis unfolded made it difficult for market participants, and regulators, to identify, anticipate, and address securities lending risks – with catastrophic consequences.

In the context of the 2008 financial crisis, one securities lending event that stands out is the massive, taxpayer bailout of AIG. By the time regulators became aware of AIG’s overly risky securities lending exposure, and the systemic risk that it carried, they saw no choice but to resort to a massive taxpayer-backed bailout.

As part of this bailout, in November 2008, the New York Federal Reserve established two entities, Maiden Lane II and Maiden Lane III, and loaned them nearly $20 billion so that they could purchase mortgage-backed securities from AIG’s life insurance subsidiaries.

This taxpayer-backed infusion of cash allowed these subsidiaries to cover their securities lending obligations with their counterparties.

As part of our mission to maintain fair, orderly, and efficient markets, and protect investors, the Commission’s action today to strengthen our rules on securities lending will help to ensure that our country’s working families are never again placed in the unfair position of having to bail out firms that took excessive and irresponsible financial risks.

In the Dodd-Frank Act, a groundbreaking law that has strengthened financial stability and protected consumers, Congress directed the Commission to address vulnerabilities in the securities lending market. A specific provision of this law directed the Commission to issue rules that increase the transparency of securities lending information available to brokers, dealers, and investors.

At the direction of Congress, the Commission is adopting a new rule designed to fill a gap in the financial data available to borrowers and lenders on securities loans. Due to the absence of centralized reporting, regulators must estimate the size and scope of the securities lending market from surveys and not from direct, hard data.

Today’s rule will yield high-quality data to the Commission that will enhance our ability to assess and monitor systemic risk. The new rule will help investors and enhance market efficiency by reducing borrowing costs, increasing price transparency, and promoting competition.

Investors and other market participants will now have access to material information about securities loans by the next business day. This should help level the playing field between borrowers and lenders in this market.

I am pleased to support the adoption of this final rule and thank Commission staff for their hard work and for meeting another important Dodd-Frank Act milestone.