The Financial Services Board has recently published a directive which provides guidance on statutory reporting and best practice principles in relation to securities lending transactions by long and short term insurers.

Both the Long-term Insurance Act and the Short-term Insurance Act require that insurers report on aggregate value and kinds and spread of assets held by an insurer to the registrar of long and short term insurers respectively. The directive was borne out of a need to establish consistent principles for the reporting of securities lending transactions concluded by insurers.

In terms of the directive, insurers are required to reflect lent securities as assets in the hands of the insurer but are required to report such transactions in different ways for different purposes. Insurers are required to reflect lent securities as:

  • claims against borrowers when reporting on the financial soundness position of the insurer; and
  • lent securities (not claims against borrowers) when reporting for spreading purposes.

An insurer must have systems and controls in place to identify and control risks associated with securities lending transactions. Controls must include a list of borrowers and lending limits applicable to each borrower approved in terms of the securities lending policy of an insurer.

There are a number of limitations imposed on securities loans in the directive. For example, insurers may only engage in securities lending transactions in respect of policyholder funds where securities which are the subject of the transaction are listed securities or term deposits. In addition, insurers are required to ensure that adequate collateral is held at all times throughout the life of the securities loan. Such collateral must either be cash, securities or a combination of both. Where an agent is used to facilitate the transactions, the directive requires that there be agreements concluded between the insurer (as lender) and the agent and the borrower and the agent.

The directive imposes certain documentary requirements and requires that certain rights of insurers, for example, rights of summary execution, be preserved in favour of insurers.

The directive became effective on 1 July 2010 and does not apply retrospectively so insurers and counterparties will not have to amend their existing transactions. However, pre-existing securities lending transactions may not be renewed or extended if they do not comply with the rules laid down in the directive.

Insurers and the counterparties involved in securities lending transactions will have to pay careful attention to the requirements of the directive. Industry participants should revisit their master securities lending agreements to ensure compliance with the new directive and should also ensure that agency relationships (where these are used) are properly documented