MPF securities lending: no trustees lending for short selling in the 2011 turmoil

As of September 2011, MPF fund performance set an unwanted record: a 12.25% third-quarter plunge that broke the 11.6% single-quarter wipeout after Lehman’s 2008 collapse, making it the worst quarter on record. More than two million workers lost a combined HK$47.098 billion, or HK$18,535 per person. Amid the panic, rumours spread that some funds were lending securities to earn high interest for short sellers — and the MPFA’s investigation brought workers one piece of good news.

Can MPF trustees lend out securities?

MPF securities lending means trustees lend securities held by constituent funds to earn interest, where regulations permit. The MPFA sets three conditions: securities on loan must not exceed 10% of a constituent fund’s assets; the custodian must have a lending agreement with the trustee; and net of fees, lending must bring members extra gains and never harm contributors.

The three conditions in detail:

The law does not prohibit MPF securities lending outright, which worried contributors: would funds lend recklessly to chase high interest and deepen the sell-off? Lending rates were rumoured to have jumped from around 2% to 7–8%, drawing many traditional funds into the lending trade. An MPFA spokeswoman said that given recent market volatility, the authority had checked with trustees and been told no MPF fund was engaged in securities lending at the time.

The third quarter: worst on record

Lipper’s September data, published on 6 October, showed MPF funds averaging a 7.75% negative return; the third quarter’s cumulative 12.25% plunge surpassed the 11.6% lost in a single quarter after Lehman’s 2008 collapse, making it the worst-performing quarter ever and hitting more than two million workers.

Offsetting: the chairman’s frustration

Separately, when employees are made redundant, the accrued benefits from employer contributions can be used to offset long-service or severance payments. MPFA chairman Anna Wu admitted her frustration: she personally favoured handling the two separately — the MPF should not subsidise severance pay, lest departing employees be forced to accept far less — but the matter involves labour legislation beyond the authority’s remit.