Australia – ASIC Consults On Substantial Holding Disclosure Relief For Agent Lenders.

6 August, 2019

 

ASIC is seeking feedback on its proposal to provide limited relief to agent lenders from the substantial holding disclosure requirements under section 671B of the Corporations Act.

 

What you need to know

 

• ASIC has released Consultation Paper 319 Securities lending by agents and substantial holding disclosure (CP 319), which proposes to grant limited relief from the substantial holding disclosure obligations under section 671B of the Corporations Act 2001 (Cth) (Corporations Act) to agents involved in securities lending.
• It is intended that the relief will be broadly consistent with the limited relief that ASIC Class Order [CO 11/272] (CO 11/272) provides to prime brokers. 
• Despite the various differences between agent lenders and prime brokers (notably that agent lenders act as agents on client instructions, whereas prime brokers act as principal), ASIC does not propose to grant broader relief for agent lenders.

Background

 

Despite the terminology, securities lending involves a transaction under which complete legal and beneficial ownership of securities is transferred from a lender to a borrower.  The borrower must generally return equivalent securities to the lender on demand or at the end of the loan term.  As the name implies, agent lenders act as agent, usually for multiple lenders, to facilitate this process. 

 

A securities lending transaction will usually result in both the lender and the borrower having a "relevant interest" in the lent securities, as defined in section 608 of the Corporations Act.  This, in turn, may trigger the substantial holding disclosure obligations under section 671B of the Corporations Act.  ASIC has made clear in CP 319 that it considers agent lenders should also generally be disclosing a "relevant interest" in such lent securities, leading to potential triple-counting of the same securities.  

 

In 2011, ASIC granted relief from these substantial holding notification obligations to prime brokers under CO 11/272.  CO 11/272 relevantly provides that (subject to certain conditions) a prime broker does not have a "relevant interest" in securities merely because the client has given to the prime broker a right to borrow the securities.  In effect, CO 11/272 defers a prime broker's relevant interest arising until the time at which the prime broker actually exercises that borrowing right.  For further details, see Regulatory Guide 222 Substantial holding disclosure:  Securities lending and prime broking.  

 

Proposed Changes

 

ASIC has now released CP 319, which proposes to provide a similar form of relief to agent lenders.  ASIC proposes to replace CO 11/272 with a legislative instrument that includes all the relief currently in CO 11/272, and extends similar relief to agent lenders. 

 

We summarise the key proposals of CP 319 below: 

 

• Modify section 609 of the Corporations Act so that an agent lender does not acquire a relevant interest in "lending pool securities" (ie securities yet to be lent) at the time of entry into an agent lending agreement.  Rather, the time of disclosure is deferred to the time at which the agent lender actually exercises its lending authority in respect of the securities (subject to certain conditions).
• Modify section 608 of the Corporations Act so that an agent lender retains a relevant interest in lent securities when the client retains a relevant interest, with the effect that the lender's relevant interest (and therefore the agent's relevant interest) is not affected by the borrower's subsequent actions.
• Grant relief so that a substantial holder does not need to disclose consideration relating to a substantial holding derived from agent lending, consistent with the relief available under CO 11/272.  
• Grant relief so that a substantial agent lender does not need to attach a copy of its agent lending agreement to the substantial holding notice, consistent with the relief available under CO 11/272 (subject to certain conditions).

 

ASIC has acknowledged certain arguments that agent lenders should be granted broader relief, perhaps from substantial holding reporting altogether, given that agent lenders act as agents and generally only act on client instructions.  ASIC has indicated that it is not minded to accept such arguments.  

 

In our view, there is a compelling case for broader relief to be granted and agent lenders should consider making submissions with a view to convincing ASIC of this.  Submissions on CP 319 should be sent by 9 September 2019.