Collateral for securities lending

OSFI’s 1992 Guideline, Securities Lending: Pension Plans, requires that lenders “hold adequate collateral to protect themselves against the risks associated with securities lending.” The guideline states that the amount of such collateral “should reflect best practices in local markets. In Canada, the current market practice is to obtain collateral of at least 105% of the market value of the securities lent.” OSFI has recently looked into current practice regarding required collateral and concludes that

• collateral of 102% of the market value of securities lent corresponds to current market practice; and
• higher limits are appropriate where there is a higher level of risk to the pension plan that is lending its assets or where established best practice standards for particular types of transactions use more than 102% collateralization.

Therefore, given current market practice, it is acceptable at this time for pension plans to obtain collateral of at least 102% of the market value of the securities lent. It is incumbent on the administrators of plans that lend securities to monitor current practices related to this activity and to increase the collateral, if appropriate.

This interpretation of our guideline is consistent with National Instrument 81-102 (NI 81-102), which governs mutual funds in Canada that offer or have offered securities under a simplified prospectus for as long as they have been reporting issuers.