ALD - Ten Years Later

This year marks the 10 year anniversary of the implementation of the Agency Lending Disclosure of Principals (ALD) in the United States Let us reflect on what has changed since then.

ALD was fully implemented in 2006 to provide greater transparency in the industry and to alleviate inconsistencies in risk and capital reserve calculations for U.S. broker-dealers. As a result, as of 2006, any borrower engaged in securities lending transactions with agent lenders (the custodian banks that hold the securities for beneficial owners) has to abide by the ALD rules.

These rules were built on four basic principles:

1. Create a principal lender approval mechanism

2. Monitor credit exposure on the principal level

3. Calculate capital requirements based on principal lender balances and collateral

4. Maintain a separate books and records sub-ledger reflecting principal lender transactions

By imposing ALD, the regulators’ intentions were, on one hand, to provide greater transparency and to allow broker-dealers to see real clients and their balances in a timely manner, and, on the other hand, to allow broker-dealers to calculate the counterparty credit risk, correctly reflecting the collateral associated with a true lender. The most important, from the broker-dealers’ point of view, result of the ALD, was providing the ability to calculate the capital requirements reflecting the reality and to then use the correct figures for Rule 15c3-1 Net Capital calculations.

Theoretically, ALD should have been one of those rules that was looked upon not as another needless regulation, but as something that would help the industry be more effective both by enhancing risk management practices, and by deploying more capital to the marketplace through the correct calculation of the required capital reserves.

Unfortunately, ALD, like many other regulations, has become a “must comply” kind of rule, where both agent lenders and broker-dealers follow the requirements but fail to actually use the rule to their advantage.

This largely affects the broker-dealer community, as there are certainly some positive attributes that can be derived from a proper ALD management, such as:

• Agent lenders' balances decomposition

• Principal lenders netting

• RWA calculations based on principal lender balances

• Principal lenders-based contingent counterparty credit risk calculation

Part of the problem is that only a few vendors in the marketplace are offering ALD-based solutions, and these solutions are designed specifically to cover original compliance, but lack any forward-looking development.

I suppose we could just wait 10 more years - hopefully something will change by then.

#securitieslending #ALD #securitiesfinance