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CESR Guidelines on Risk Measurement

Towards the end of 2010, CESR — the Committee of European Securities Regulators - set out new guidelines on Risk Measurement and the Calculation of Global Exposure and Counterparty Risk for UCITS regulated funds. One of the key conclusions of CESR is that if UCITS funds are authorized to undertake securities lending aand repo transactions, the reinvestment of cash collateral must be taken into consideration for the determination of the funds ‘global exposure’. In order to arrive at this calculation, the UCITS fund (or their nominated service provider) will be required to aggregate the securities lending exposures with other data as part of the overall risk management and reporting process. The guidance issued by CESR further states that an exposure only arises where the value of collateral held by the UCITS falls below the loan value. On the cash collateral, given the very conservative nature of UCITS cash collateral guidelines it would be unlikely for the market value of the investments to fall below the loan value, however monitoring of this may be required.

J.P. Morgan, together with representatives of the International Securities Lending Association (ISLA), were involved during the consultation process and responded to CESR on the implications for securities lending.

France issues new rules on short selling

In October 2010, the French Parliament approved the Banking and Financial Regulation Act (No. 2010-1249 — the “Act”), which many have been referred to as “Dodd-Frank à la française”. As a result of the act, the rules surrounding the disclosure of net short positions — known as the ‘Net Short Position Order’ — were amended and a new reporting regime was implemented.

Year End Tax Changes

As is normal at the end of a calendar year, many governments publish budgets or approve tax treaties with other countries which result in changes to withholding tax rates. These tax changes have an impact on securities lending, and the key changes for this year are summarized below:

United Kingdom / Germany — the new treaty between the U.K. and Germany took effect on January 1, 2011. As a result of this, U.K. resident pension funds (and life funds providing pension benefits) are now entitlement to a reduced rate of withholding tax on German dividend payments of 10%. This is being reflected in the rate of manufactured income collected when assets are on loan.
United Kingdom / Netherlands — a new provision in the treaty between the U.K. and the Netherlands which took effect on January 1, 2011 means that all taxable U.K. resident lenders will now pay a 10% Dutch tax on equity investments. This is being reflected in the rate of manufactured income collected when assets are on loan.

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