PenCom issues framework for securities lending, repurchase transactions by PFAs

The National Pension Commission (PenCom) has introduced a framework for pension fund administrators (PFAs) to engage in securities lending and repurchase transactions (repos).

Securities lending is a transaction where securities are temporarily transferred from a lender to a borrower, typically in exchange for a fee or collateral.

While Repos are the sale of securities with a simultaneous agreement to repurchase them at a specified price on a specified date.

In a circular on Wednesday, signed by A. M. Saleem, PenCom director of surveillance department, the commission said reporting and disclosure of quarterly statement to PenCom include the value of securities on loan (by asset class).

Saleem said the quarterly reports also include a list of counterparties and exposures, composition and valuation of collateral, and income earned and fees paid.

For annual reports to retirement savings account (RSA) holders, the director said PFAs shall disclose securities lending and repo activities, revenue earned, and agent arrangements.

According to Saleem, Securities lending and repo positions must be clearly disclosed in the notes to the financial statements of the fund,

He said PFAs shall disclose, in both quarterly returns to the commission and annual reports to RSA holders, the gross revenue earned from securities lending and repo transactions.

“The total fees and expenses deducted, with a breakdown of each component (agent fees, custodial fees, operational costs),” he said.

“The net revenue credited to the fund; The identity of any agent, lender, or third party receiving a share of lending revenue.

“Any affiliation between the PFA and the agent lender, where applicable.”

Saleem said all revenue splits shall be on an arm’s-length basis, pre-approved by the PFA board, and subject to commission oversight.

He further said securities lending and repo activities shall form an integral part of the annual independent audit conducted by the external auditors of the operator.

The audit report, including specific findings on securities lending and repo activities, the director added, shall be submitted to the commission in accordance with prescribed timelines.