Securities lending and cash collateral reinvestment: lessons from the Forsta case

A long-term holder of securities, such as a mutual fund or a pension fund, may wish to enhance the yield provided by such securities by lending in exchange for collateral and a fee. The lender pays interest on any cash collateral or, should the interest exceed the securities lending fee, a rebate. The securities are typically lent to brokers to use them to cover short sales by their other clients (usually hedge funds).

Forsta AP-Fonden (AP) is a Swedish pension fund. The Bank of New York Mellon (BNYM) acted as AP’s global custodian. BNYM also managed AP’s securities lending programme, under which securities owned by the pension fund were loaned out in return for cash collateral.

In this case, the cash collateral received was partially reinvested in other securities including certain medium-term notes (MTNs) issued by Sigma Finance…

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