The London Pension Fund Authority (LPFA), one of the UK's largest local authority schemes, is preparing to resume stock lending in the next few days after suspending it last September.
The move indicates pension funds are now willing to lend stocks to short sellers after the Financial Services Authority lifted its short-selling ban on Jan. 16.
To execute their trades, short-sellers often borrow stock from institutions such as pension schemes. As a result, stock lending volumes are seen as a reliable proxy indicator for levels of shorting activity.
"We had been effectively delegating our stock lending to a custodian and we hadn't understood the potential risk around cash collateral," Mike Taylor, chief executive of the LPFA, told Reuters on the sidelines of the National Association of Pension Funds investment conference.
He said trustees queried whether "stock lending is evil because it leads to short selling." Taylor added: "There's no evidence to say it is."
The pension fund, which has assets of 3.7 billion pounds ($5.13 billion), suspended its stock lending programme after regulators across the world stepped in to curb short-selling of financial stocks in September last year following the collapse of Lehman Brothers.
"We appeared maybe to have issues with Lehmans' in September." Taylor said. "We decided to review it at that point."
The fund is now set to resume stock lending in the next few days, following an investment committee meeting, in time for the March-July period, which is the most profitable time of the year for lenders, Taylor said.
Institutions which choose to lend securities profit by charging fees to the borrower. Stock lending generates some 700,000 pounds in income each year for LPFA.
OPPORTUNISTIC
The fund has also set aside 150 million pounds, or five percent of overall assets, for opportunities arising from the crisis and is soon to make an investment in a credit fund.
"We have flexibility to move quite quickly in 50 million pound chunks if we want to on opportunistic stuff," Taylor said.
"We've looked at a whole range, largely in the alternatives area, but we're just now doing due diligence on a bond fund."
"Although my instincts are to do nothing at this time anything opportunistic that comes along, maybe with an illiquidity premium over the next 5 to 10 years, that's something we'll look at quite seriously," Taylor said.
