Bloomberg News

European Funds Face Tougher Rules for Securities Lending

July 25, 2012

Europe’s top markets regulator proposed tougher rules for managers of funds for retail investors, tightening guidelines on securities lending and moving profits from such loans directly to investors.

Fund managers lending securities to other funds, typically for the purpose of short selling, should ensure they can recall the securities and cancel the arrangement at any time, the European Securities and Markets Authority said today. The profits of the transaction should go directly to investors because they bear the risk, the ESMA said.

European regulators are trying to make investors aware of the lending process and remove the incentive for funds to lend more assets by requiring them to pass on the profits from the practice to customers. Investors risk losing their assets if the counterparty borrowing them is declared bankrupt, as happened with Lehman Brothers Holdings Inc. in 2008.

“These comprehensive guidelines are aimed at strengthening investor protection and harmonizing regulatory practices across this important European Union fund sector,” Steven Maijoor, chairman of Paris-based ESMA, said in a e-mailed statement today.

European funds lend about 30 percent more of their securities than do counterparts in North America, according to CACEIS Investor Services, a custodian and trading unit of Credit Agricole SA. (ACA)

More Lending

In the second quarter of 2010, about 31 percent of European sovereign bonds and 12 percent of equities in the region were on loan, CACEIS has reported. That compares with 19 percent of North American sovereign debt and 8 percent of the region’s equities.

Peter de Proft, director general of the European Fund and Asset Management Association, declined to comment on ESMA’s proposals before consulting with his members. The European Federation of Investors didn’t return a call seeking comment.

ESMA, set up in 2011 to harmonize market rules across the 27-nation EU, is overhauling regulations governing fund managers. The agency last month proposed that bonuses for senior hedge-fund managers should be deferred to align their personal interests with the amount of risk their firm takes.

To contact the reporter on this story: Ben Moshinsky in Brussels at

To contact the editor responsible for this story: Anthony Aarons at

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