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Beneficial owners clash on indemnification
05 February 2014
Panellists at a securities lending conference disagreed on the value of being indemnified against borrower default. Stephanie Baxter reports
Indemnification against borrower default is important to most
lenders of securities but not all, a panel revealed at the IMN
beneficial owners’ international securities
lending conference in Texas.
The topic is a very controversial one given that while it is
deemed essential by most beneficial owners involved in
securities lending, there are concerns that future capital
rules will increase the costs of agent lenders providing the
service. Dodd-Frank section 165(e) will increase the amount of
capital banks will have to put up to provide indemnification, a
cost that could be passed onto beneficial owners.
Charles Rizzo, chief financial officer, John Hancock
Investments, said the question of whether his firm can live
without indemnification is "probably a non-starter". "It is
probably something we wouldn’t be willing to go
without," he added.
Rizzo said that one benefit of indemnification is that the
programme risks at a fund level are "well-aligned" with the
risks of lending agents, particularly relating to transactions
with counterparties and volume of loans to particular
"In that sense it serves as good mitigation process and control
for funds that lend."
Although Rizzo’s point of view tends to reflect
that of most beneficial owners, Brian Yeazel, managing
director, fixed income, Mason Street Advisors, questioned the
value of indemnification.
"It’s important to show the board
you’re doing something about risk but I wonder how
much that indemnification is really worth at the end of the
Yeazel said it is important to look at where risk lies in a
lending programme, and he estimates that around 90-95% of risk
is born from reinvestment of collateral. Programmes blown up in
the past 20 to 30 years have been almost exclusively due to
problems with collateral pools or cash reinvestment, he
James Vance, vice president and treasurer, Western &
Southern Financial Group – which runs an insurance
programme, a mutual fund programme, and a pension fund
programme – said indemnification is "extremely
important and something our finance committee looks at".
Christine Bosco, trader, Franklin Templeton, said although she
acknowledges there is an argument that one can survive without
indemnification, there are still some unanswered questions
around the consequences of doing so.
"How would an unindemnified programme impact your recall
process or even corporate action process? There are certain
things outside default guarantee that also sit with
indemnification that we would also want to consider before we
consider an unindemnified programme."