1 To 3 Years Of Securities Recalls Aka Forced Squeeze To Go

July 27th, 2009 by Tyler Durden

After numerous posts on this blog discussing speculation of assorted forced buy ins, it seems that this phenomenon is quite factual and quite pervasive among the asset management community. As Zero Hedge has noted previously, forced buy-ins are a critical issue as it leaves shorts at the mercy of their securities lenders and repo desks (most of which are TARP recipients and thus beneficiaries of higher stock prices) which generically have the option of recalling lent out shares at a moment's notice, and thus creatingartificial purchasing pressure: i.e. a forced short squeeze. According to Securities Industry News, in a recent survey by Callan Associates, over half of the respondents said they are undergoing a "controlled unwind" with their securities lending desks (aka State Street, BoNY, and Northern Trust).

Firms participating in securities lending programs are trying to reduce their risks and push for greater disclosure of what happens to cash given as collateral, according to a survey released this week by Callan Associates, a San Francisco-based investment consulting firm.

About half of the respondents to the Callan survey said they are undergoing a process called “controlled unwind” to reduce the risks in their existing securities lending programs and minimize current and future losses. Properly executed, an unwind involves recalling securities out on loan without incurring any financial loss or restricting either the number of transactions or the types of securities lent.

Almost all the respondents are using their current custodian or securities lending provider for the unwind and most believe it will take one to three years to complete, said Callan.

More than half of the 44 respondents who said they wanted to make changes to their securities lending programs rank fine-tuning their cash collateral reinvestment guidelines as their top priority. This reflects a common concern among respondents about losses coming from the reinvesting of cash used as collateral against the securities that are lent out.

The firm surveyed 72 fund and plan sponsor organizations of which public and corporate funds comprised the majority of survey respondents. About 54 percent of the respondents were mid-sized funds that hold from $1 billion to $9 billion in fund assets. Nineteen percent of the respondents were small funds with less than $1 billion. The remaining respondents were split between “mega” funds with more than $25 billion in assets and large funds with between $10 billion and $24 billion in assets.

Bottom line - in a market where an unknown but significant amount of trading is based on widely permitted and pervasive advanced looks compliments of the exchanges, ECNs and the regulators, and the balance consists of artificial buying from rolling buyins, only the most insane, or foolhardy or both, believe they can trade with any hope of short or long-term success.


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