EU regulators get tough on fund mangers

City A.M. Reporter
EUROPEAN fund firms could lose out on revenues under new EU rules to toughen up supervision of securities lending published yesterday.

Securities lending is commonplace in the mutual fund industry globally as a means of boosting revenue as well as reducing management fees.

Under European markets watchdog ESMA’s proposals, all revenues generated by securities lending will now have to be returned to investors in the funds and there will be stricter requirements about the types of collateral posted.

“These guidelines are a valuable response to many of the issues identified in the ongoing debate on shadow banking,” Steven Maijoor, chair of ESMA said.

According to Markit Securities Finance estimates, funds have more than $12 trillion of lendable inventory in lending programmes, of which $1.7 trillion is currently out on loan. Funds lend out securities to outside investors -- hedge funds betting on a fall in an equity index by short selling shares, for example -- in exchange for collateral and a fee.

The practice is also becoming more popular with ETFs as the $1.7 trillion industry grows in size, with the extra revenue compensating for slim profit margins as the race to reduce costs for investors has intensified.