Japanese Pension Giant GPIF Suspends Stock Lending for Short Selling

World’s largest retirement fund says practice is ‘inconsistent’ with stewardship duties.

Japan’s $1.49 trillion Government Pension Investment Fund (GPIF) has suspended stock lending for short selling on its conclusion that the trading method creates a trading gap that is “inconsistent” with its stewardship responsibilities.  [Source 1]

The fund said that as part of its stewardship responsibilities it requires its asset managers to improve the long-term value of investee companies by exercising voting rights conscientiously, as well as engaging in constructive dialog with the companies. Stock lending, however, is contradictory to this requirement because it results in a temporary transfer of ownership rights to the borrower the fund said.

“This effectively creates a gap in the period in which the stock is held by GPIF and can be considered to be inconsistent with the fulfillment of the stewardship responsibilities of a long-term investor,” said the fund in a statement. “Moreover, the current stock lending scheme lacks transparency in terms of who is the ultimate borrower and for what purpose they are borrowing the stock.”

The fund said it halting stock lending until further notice, but that the move may be reconsidered later if improvements are made to enhance transparency and address the inconsistencies. The suspension does not affect lending activities related to debt securities.

The move was praised by Tesla founder and CEO Elon Musk, who has frequently complained about short selling and has derided short sellers of his company’s stock. 

“Bravo, right thing to do! Short selling should be illegal,” Musk said in a Tweet.

Because the fund does not engage in stock lending for domestic shares, the move only affects the fund’s foreign equities portfolio, which is worth approximately $391.2 billion. According to Reuters, securities lending earned the GPIF $345.91 million in fees from lending shares from its foreign equity portfolio over three years to the end of its 2018 fiscal year.

Meanwhile, the TSX Venture Exchange in Canada is reported to be considering the reinstatement of a so-called “uptick rule” that would allow traders to short a stock only if it was moving upward. The rule would only apply to company stocks with a market cap of less than C$250 million ($188.1 million).

A similar rule existed in Canada until 2012 but it was repealed after research found that it was not an effective method to prevent sharp and rapid price drops.

The move to eliminate short selling in Canada is being pushed by advocacy group Save Canadian Mining, which says that since the “uptick rule” was repealed short selling activities, high frequency trading, and algorithms are exploiting its removal “to the detriment of Canada’s junior markets.”  


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