DTC Begins Testing SMART/Track For Agency Lending Disclosure
While the industry gears up for the implementation of guidelines that foster greater transparency in agency lending disclosure next year, The Depository Trust Company (DTC) has already begun testing the transmission of lending data between agent lenders and borrowers with its new service called SMART/Track for Agency Lending Disclosure.
“We started with connectivity testing between DTC and vendors involved in the program, as well as connectivity testing between DTC and customers who will connect directly to us for data transmission,” said Margaret Koontz, vice president, Product Development for DTCC. “On July 1, both lending agents and broker/dealers were able to start testing, sending files back and forth to one another.”
The industry and regulators have called for the new guidelines to be in place and operating by March 1, 2006.
Task Force
The push for greater transparency in agency securities lending transactions began more than two years ago when the Securities and Exchange Commission (SEC) expressed concerns about the level of information provided borrowers by agent lenders. The Securities Industry Association (SIA), the Risk Management Association and The Bond Market Association, working in conjunction with regulators, formed the Industry Agent Lending Task Force in January 2004 and asked DTC, a task force member, to develop a central communication hub for the transmission of agency lending data.
DTC’s SMART/Track for Agency Lending Disclosure, which is subject to regulatory approval, “will essentially act as a post office for agency lending disclosure,” said Koontz. “It will transmit the agency lending data files to the designated broker/dealer, but will not edit or validate the data contained with the files.”
Basically, two types of files will be transmitted, including:
- Periodic data files that enable borrowers to do their own credit pre-qualification of principal lenders they choose to deal with;
- Daily open loan files that agent lenders will send to borrowing broker/dealers.
Principal Lenders
Agent lenders and borrowers on the same technology platform – Loanet or EquiLend – can transmit information directly from one to another. But if lenders and borrowers are on different platforms, DTC will serve as their communication hub. All customers can also elect to sign on to DTC directly via SMART/Track.
Agent lenders, as the name suggests, lend securities to borrowers – mainly broker/dealers – on behalf of other parties. For example, if a borrower requests 5,000 shares of XYZ stock from an agent lender, the lender will allocate the loan to various funds and institutions, say 1,000 from a pension fund, 2,000 from a mutual fund, and 2,000 shares from another fund. Then, in one transaction, the shares are delivered to the borrower. The agent lender, however, remains a go-between and is not a principal in the transaction, and the borrower doesn’t know who the principal lenders are.
“This has implications for the credit and capital aspects of the business,” said Les Nelson, managing director in Global Securities Lending for Goldman, Sachs & Co. and chairman of the Agency Lending Disclosure Task Force. “If borrowers don’t know – on a loan-by-loan basis – who their principal lending counterparties are, they can’t determine their credit exposure to these principals on any given day.
“In addition, there are very specific capital rules intended to capture the exposure that a broker/dealer borrower has to a lender,” said Nelson. “If a borrower has collateralized a lender at greater than 105% of the value of securities borrowed – 105% is specified by existing regulations – the borrower may be required to take a regulatory capital charge as a result of that exposure.”
“If this exposure is created as a result of a decrease in the value of the borrowed stock, the borrower can do a “mark-to-market” and get back some of the collateral they posted for the stock, eliminating the need to take a capital charge,” Nelson said.
Required Information
With the new agency lending disclosure initiative, agency lenders will be required to provide data to the borrowers’ credit and regulatory capital groups so they can monitor credit exposure and calculate capital requirements for each principal lender. While they will not be required to book individual loans by principal lender, borrowers will need to retain these records in accordance with existing regulations.
In addition to transmitting loan data, SMART/Track:
- Notifies the sender that it has received the file and that it has been sent to the receiver.
- Creates a receipt record for the sender or generates an error code if it cannot deliver the file.
- Provides a Web screen for agent lenders, borrowers and vendors to browse the status of files being processed and to request the creation of unique identifiers for principal lenders.
The service is open to non-DTC members, and DTC will assign these “unique identifiers” to principal lenders who do not have a U.S. tax identification number.
“While most principal lenders have a nine-digit U.S. tax identification number, there is a small universe of lenders that do not,” said Koontz. “SMART/Track will create and maintain a table of unique identifiers.”
Editor’s Note: For more information on Agency Lending Disclosure, visit www.stp.capco.com. Readers can also access DTCC’s SMART/Track User Guide for Agent Lender Disclosure by clicking on “Documents,” then “Infrastructure Working Group Documents” and lastly “DTCC SMART/Track User Guide.” @