Stock lending is a long-established way to generate additional income for an investor. The general prudential provisions of the LGPS Investment Regulations obviously apply when the activity is undertaken by LGPS funds, and it should be conducted in accordance with the relevant Rules under the Financial Services and Markets Act 2000. Bank of England guidance has also been issued.

Under the LGPS Management and Investment of Funds Regulations 1998, a "Stock lending arrangement" means an arrangement such as is mentioned in section 263B of the Taxation of Chargeable Gains Act 1992. [regulation 2]

Th current limit is a maximum of 25% of the value of an authority's pension fund on "All securities transferred (or agreed to be transferred) by the authority under stock lending arrangements." [regulation 11 and Schedule 1, Part I, paragraph 11]

There is no specific reference to stock lending in the investment provisions of the EU Directive on Occupational Pensions.

The Collective Investment Scheme Sourcebook, made under Part 10 of the FSMA 2000, contains Rules 5.14.4R and 5.14.6R which apply to stock lending transactions by open-ended investment companies and unit trusts. Regulation 3(7) and 3(8) of the LGPS Investment Regulations provide that stock lending for the purposes of the Regulations must also comply with the above-mentioned Sourcebook Rules, and that the administering authority is to be treated as "the trustee" in Sourcebook terms.

The Rules say stock lending can only be used "when it appears [to the responsible manager] to be economically appropriate to do so with a view to generating additional income for the … fund with an acceptable degree of risk".

"Permitted stock lending" must be under an agreement :

whose terms are acceptable to the trustee and are in accordance with good market practice;

with a counterparty which is an authorised person;

which provides security in the form of collateral that is acceptable to the depositary, adequate and sufficiently immediate.

"Adequate" collateral must be transferred to the depositary or their agent; be at least equal in value, at the time of the transfer, to the value of the lent securities; and be in one of a number of specified forms (eg government and public securities).

Collateral is "sufficiently immediate" if it is transferred before or at the same time as the securities being lent; or if the depositary takes reasonable care to ensure it will be transferred at the latest by close of business on the same day that the securities are.

There is no limit in the Sourcebook on the amount of property that may be the subject of stock lending transactions.

FSMA 2000 established a new framework for the authorisation and regulation of firms undertaking "regulated activities". Many participants in the stock lending and borrowing market are subject to the FSA's Principles and to other rules in/made under the Act.

There are a number of relevant Bank of England-sponsored Codes, namely the :

Stock Borrowing and Lending Code of Guidance - January 2001.

Produced by the Bank of England-chaired Securities Lending and Repo Committee (SLRC) of market practitioners and regulators. This Code is for all UK-based participants in the stock lending and borrowing market : principals making markets and trading, brokers acting as intermediaries, agents (such as fund managers & custodians) undertaking stock lending on behalf of their clients, and end users lending stock from their portfolio. Most of these parties are market professionals. The SLRC are currently reviewing the Stock Borrowing and Lending Code.

intended to help market participants with transactions involving UK securities. For instance, it contains useful information on Voting (section 9) and UK taxation (section 7). This is expected to be kept under review and updated at appropriate intervals.

Equity Repo Code of Best Practice - 1997

On the borrowing and lending of gilt-edged securities

The Stock Borrowing and Lending Code includes a Global Master Securities Lending Agreement or Stock Lending Legal Agreement, which participants are recommended to use. The regulatory authorities are not responsible for enforcing the Code. Neither they nor the Committee can act as an arbitrator in the event of disputes between market participants.

A useful recent publication is "An Introduction to Securities Lending" March 2004, issued under the auspices of the Bank of England Securities Lending and Repo Committee, the London Stock Exchange, the British Bankers Association, the London Investment Banking Association and Association of Corporate Treasurers. This introduction sets out to give an accessible account of securities lending markets, how they work, who is involved and why. The intended audience includes trustees of pension funds who already lend securities, or might consider doing so. The publication was welcomed by the National Association of Pension Funds and the Association of British Insurers.

Both it and the Codes can be found on the Bank of England's website at www.bankofengland.co.uk/markets/slrc/htm by following the appropriate links.

The CIPFA Pensions Panel also produced in 2001 a Guide to Stock Lending by Local Authority Pension Funds..