Update: US State insurance Department calls CCP model a moot point following lending guidance

The State of New York Insurance Department has not ruled out exemptions to the recently-issued draft guidance for securities lending in cases in which trades were executed through a central counterparty (CCP).

Last week GSL followed the Department’s release of ‘Prudent Practices’ in a circular letter to insurer members engaged in securities lending. On the back of “concerns” over the losses of certain members – chiefly through cash collateral reinvestment – the guidelines are conservative, including a limit on the assets available to lend as less than 5% of total assets, with no more than 10% of that percentage residing with a single borrower.

In the Department’s latest response to GSL.tv, spokesperson Andrew Mais stated: “The Department would need to gain a better understanding of the role that a central counterparty plays to determine whether trades could be exempted.”

He added that the relatively wide choices for instruments in which the cash could be reinvested did not offset the low ceiling of lendable assets. Rather, “the reinvestment of the cash collateral must be made in investments that are allowable under the New York Insurance Law. The reinvestment options recommended in the Circular Letter generally map Article 14 of the Insurance Law.”

Despite the concerns of losses incurred by some members, Mais added that there were no available statistics to more clearly demonstrate these hits taken by insurers.