In partnership with the Federal Reserve and Securities and Exchange Commission, the OFR conducted a pilot project to fill gaps in data about securities lending. This pilot project followed the OFR’s collaboration with the same two agencies to collect data about repurchase agreements, or repos. In securities lending, securities owners lend stocks or bonds to other parties. These loans are secured by collateral, which can be cash, other securities, or other financial assets.
Securities lending makes financial markets more liquid by increasing the supply of securities, and also facilitates price discovery. Securities lending allows investors who believe that a security is overvalued to borrow the security and sell it short, hoping to buy it back later at a lower price.
Securities lending and related activities may pose risks to financial stability. During the financial crisis, some securities lenders had large losses on cash collateral reinvested in other securities. These losses were one of the main reasons the government provided assistance to prevent the bankruptcy of the insurance company American International Group.
Data gaps prevented regulators from identifying and addressing risks in the securities market during the crisis, and those gaps persist. The OFR and its partners aimed to address this critical data need through the pilot data collection.
The Financial Stability Board has recommended that its members collect data on repos and securities lending from a broad range of market participants.
See the Director’s related blog post – Shedding Light on Securities Lending.