Following the consultation paper issued in July 2007 and subsequent discussions in ISLA legal and tax working groups, ISLA is publishing for consultation a revised version of the GMSLA. We are grateful for drafting assistance from Freshfields, Deloittes and PriceWaterhouseCoopers.

Also attached is an updated draft UK tax addendum, also for comments; a covering memorandum summarizing the main proposed changes; and a press release.

Comments from ISLA members and other interested parties are welcome by 30 June 2008 to david.rule@isla.co.uk.

ISLA has issued the attached press release and consultation paper on a proposed model for agent lender disclosure in Europe to provide borrowers with the information they need to manage counterparty credit exposures and calculate regulatory capital requirements under Basel 2.

The main proposal is to replicate in Europe the existing US ALD model, including use of the data exchange hub provided by DTCC and the same standardised file formats used in the US model.

Some adaptations to file content are proposed, induding recommended reporting of agency repo transactions, optional reporting of agency reverse repo transactions, triparty collateral reporting and DBV reporting. Responses are invited by 31 May to david.rule@isla.co.uk, including feedback on implementation lead times.

Also available are the following appendices:

• Appendix 1 - Members of the ISLA ALD working group
• Appendix 2 - Proposed Daily Loan Data File
• Appendix 2 - Proposed Daily Loan Data File Header
• Appendix 2 - Proposed Daily Loan Data File Trailer
• Appendix 2 - Proposed Daily Loan Data File Appendix A
• Appendix 3 - Proposed Daily Non-Cash Collateral File
• Appendix 4 - Proposed Non-Cash Collateral File with Sample Data
• Appendix 4 - Proposed Loan File with Sample Data
• Appendix 5 - Proposed DBV Classes
• Appendix 6 - Proposed Industry Classification Codes
• Appendix 7 - DTCC Proposal

The ISLA Board has agreed the following guidance in relation to outstanding loans of former Northern Rock shares, following requests from market participants.

The document can be found here.

Please find here a short ISLA paper and review of the academic literature on securities lending and short selling.

Following discussion at the ISLA Operations Forum, ISLA has made the following recommendation in relation to the recent French Market ESES migration.

With immediate effect, all Securities Lending transactions conducted in the French Domestic market should be instructed with the true trade date of the transaction. The current practice of instructing Securities Lending transactions to the market with trade date = settlement date should no longer apply.

Any IT based system changes should be completed by the end of January 2008. In the case of any trade date mismatches, any counterparties still instructing with trade date = settlement date should amend their dates to reflect the true trade date of the transaction.

On 22 November 2007 the Independent published an article entitled 'Markets become short sellers’ paradise'.

A copy of the letter to the editor from David Rule, ISLA Chief Executive, responding to that article can be found here.

ISLA has today published a consultative paper on proposed changes to the Global Master Securities Lending Agreement (GMSLA). The GMSLA was published in May 2000 and is available here.

This consultation paper, available here, follows a review of the Agreement that has included legal, tax and operational working groups. Comments on the paper should be sent to admin@isla.co.uk by 31 August 2007 and are welcome from ISLA full members, ISLA associate members and other interested parties. In the light of comments, ISLA will produce a first draft of the revised GMSLA for further comments. The aim is to have finalised the draft by early 2008.

On 16 June the Financial Times published an article in its Observer column entitled 'Little money to be made by institutions lending stock' which suggested that fees for lending UK equities are low given that voting rights are transferred.

A copy of the letter to the editor from David Rule, ISLA Chief Executive, responding to that article can be found here

On 10 March, the Dutch Financial Daily published a response by ISLA to an article in its 19 February edition on the subject of securities lending and shareholder voting.

A copy of ISLA's letter can be found here

The City of London has today published a report entitled 'The European Post-Trading Industry: Assessing the Impact of Market and Regulatory Changes', a copy of which may be found here on the City of London website.

Whilst there is only a fleeting reference to securities lending, defining it as part of the post trading activity (page 13), the report makes some important observations on the European Commission's previous publications on the subject of Clearing and Settlement and the removal of the Giovannini barriers.

The report regrets that there is, it believes, insufficient data on a country-by-country basis to enable accurate estimates to be made of existing costs and potential savings on a similar basis. By relying on EU wide data, it believes that the cost savings overall may have been exaggerated. It also challenges the view that the breaking down of the barriers will necessarily lead to greatly increased trading activity.

ISLA will continue to participate in the debate on clearing and settlement through the various committees of which we are a member and, through our operational sub-group, contribute to the removal of the Giovannini barriers, most notably in the area of Corporate Actions.

ISLA is working on a full review of the standard industry legal agreement for securities lending transactions the Global Master Securities Lending Agreement (GMSLA), first produced in 2000. Working groups are examining legal, tax and operational issues.

ISLA expects to produce an updated agreement for consultation later in 2007. Further details can be found on the members' page.

The Wall Street Journal lead story on Friday 26 January was headlined 'How borrowed shares swing company votes: SEC and others fear hedge fund strategy may subvert elections'. The article appears to have been triggered by research published by the University of Texas some months ago based on studies of a number of occasions where borrowing to vote has been alleged: for example, the widely reported Henderson Land affair in 2005 and Laxey Partners in 2002.

One of ISLA's stated aims is to establish best market practice, and the field of corporate governance is no exception. We have contributed to Paul Myners' Shareholder Voting Working Group, which has done much to improve the ease and level of voting over the past few years, one of our Executive Committee members chairs our Corporate Governance sub-group and we liaise closely with our equivalent securities lending associations in North America and Asia.

We consider that the WSJ article exaggerated, and in some instances misrepresented, the effects of securities lending and borrowing on corporate governance. Consequently, we have submitted this letter to the editor.

We would also draw your attention to the publication 'Securities Lending and Corporate Governance' which may be accessed via the link on the left hand side of our homepage.

We firmly believe that securities lending is wholly consistent with maintaining robust voting policies.

On Wednesday, January 17th, the ALD working group members met with the FSA to discuss an Interim European ALD proposal.

The objective of this meeting was to gain traction on the details of an Interim Capital Treatment for Agent Lending in Europe that meets Basle II requirements. The proposal was well received and a more detailed proposal was requested by the FSA before they would grant more formal approval for the approach. The ALD Capital Working Group will produce the more detailed proposal and post this to the ISLA website when finalized. Members please log in to the members site for more information and the presentation to the FSA.

A copy of ISLA's response to the FSA's recent consultation on Best Execution under MiFiD, can be found here.

Under present regulations, stocklending is exempt from Best Execution rules: MiFiD proposes to include it in future.

Whilst ISLA supports the underlying principals, namely that arrangements and policies should be in place, which are subject to at least annual review and can be shown to have been followed, we cannot support the concept of Benchmarking. This is because no two lending portfolios are the same and there is no comprehensive database of prices obtained, which would in any event not be comparing like with like. For example, lending portfolios have differing collateral requirements and differing limits, regarding both counterparties and the amount that can be lent at any one time. All these considerations may have an impact on price.

We are not aware that there have been any complaints about the prices obtained and consider the existing good practices of defining policies and operational requirements should suffice.

FSA has published a Discussion Paper (DP06/03) on Best Execution, with a closing date for comments of 17 August. Further comment will be posted when we have had the opportunity to consider the proposals in depth.

Links to the full text, and the accompanying Newsletter, may be found here:

• www.fsa.gov.uk/pages/Library/Policy/DP/2006/06_03.shtml

ISLA has submitted a response to the Dublin Funds Industry Association (DFIA) in respect of changes drafted to IFSRA UCITS Notices 10 and 12. ISLA made comments in 3 areas:

• Direct comments on the proposed revisions;
• Seeking clarification on existing language in the UCITS Notices;
• Encouraging expansion of existing regulation to allow for more lending opportunities.

There have been further delays in the publication of the Level 2 proposals from the commission. The latest projected publication date is for the week commencing 6 February, some four weeks later than originally expected. This will have a knock on effect of the publication of the FSA's own consultation on the Level 2 proposals, which may not now appear until perhaps June. So far, the already deferred implementation date of November 2007 has not been moved.

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The European Commission has just published a second revision of its Working Document on certain aspects of the Transparency Directive. Those sections relating to the reporting of changes in ownership of voting rights will be of particular interest to our members.

Further updates will be available on this site once we have debated the content of this latest revision. The consultation does not close until January 2006.

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Euroclear has published a consultation on Securities financing and settlement windows on the single platform. The full text may be found here

ISLA members have already been involved in bi-lateral pre-consultation discussions with Euroclear on their proposals which cover all the markets in which Euroclear operates.

The consultation period does not close until 3 March 2006. ISLA's Operational sub-Group will prepare a formal response.

CESR has published its responses to its consultation on the Transparency Directive. ISLA’s questions have been answered specifically in the following paragraphs of the Feedback statement, the full text of which can be found here:

www.cesr-eu.org/data/document/05_408.pdf

282. Finally, a respondent raised questions about securities lending and collateral movements.
The consultee requested clarification in relation to a situation where the shares are transferred to the borrower (or the lender), and the legal agreements enable the original holder to retain control of the vote in practice, whether lender or collateral giver.

283. CESR points out that under Article 10(c), if the collateral lodger still has the ability to decide how the voting rights are to be exercised, irrespective of the fact that the shares have been given to the collateral holder as collateral, then the collateral holder is not required to make a notification.
Similarly under Article 10(f), if the depositor has the ability to decide how the voting rights are to be exercised, irrespective of the fact that the shares have been deposited with the deposit taker, then the deposit taker is not required to make that notification.

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The Internal Markets division of the European commission has conducted a second consultation on shareholders' voting rights, the full text of which can be found here.

ISLA confined its response to the section on securities lending and the full text is available on the members pages

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The European Commission is consulting on pre- and post- trade transparency. There are important new proposals for share loans which are covered at Section 3 and Article 12 respectively of the attached documents.
ISLA will be submitting a response by the closing date of 15 August.

http://www.europa.eu.int/comm/internal_market/securities/docs/isd/dir-2004-39-implement/esc-21-2005_en.pdf

http://www.europa.eu.int/comm/internal_market/securities/docs/isd/dir-2004-39-implement/esc-21-2005-explanatory_en.pdf

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CESR’s latest consultation on the Transparency Directive closed on 27 May.

Whilst the Directive covers both the reporting requirements by companies of their performance as well as transfers of securities carrying voting rights, ISLA is only concerned with the latter issue.

ISLA has requested clarification of the shareholder reporting requirements proposed by the Directive, centred around the definition of ‘collateral’. We are concerned that unnecessary and unintended reporting requirements could arise in that the legal agreements underpinning our members’ activities create ‘an absolute transfer of title against an irrevocable undertaking to return equivalent securities on demand’. In that a securities loan is an absolute transfer of title, both the right to dividends and the voting rights are transferred. Arrangements are in place for the lender to be compensated for any dividends, and the right to vote, if required, is protected by the right to recall securities on demand.

The ‘absolute transfer of title’ is a method of taking collateral, and indeed a safer one than for example a charge or a pledge, and we are anxious that, for the purposes of the Directive, it is included in the definition of ‘collateral’.

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Paul Myners has just published his further report on shareholder voting, Review of the Impediments to Voting UK Shares, which can be found here.

In summary, he has been pleased with the progress over the last twelve months but there is still more work to be done. He will be reviewing progress again in a year’s time.

For further commentary, see the members’ section..

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ISLA has responded to the recent European Commission consultation on shareholders’ rights, concentrating on the section concerning securities lending and the right to vote. We believe that the existing SLRC Code of Good Practice makes ample provision for the lender to be able to recall stock so that the vote can be exercised. We do not believe that further legislation is required, rather that market participants should, if necessary, strengthen their internal policies and procedures on voting.

We are also pleased to publish the response from John Picitto Consulting Ltd, which draws attention to the provisions for recalling stock for voting and also believes that further legislation is unnecessary. John is an independent consultant whose services are used from time to time by ISLA.

All the responses will be published on the Commission’s website in due course.

Members click here for more details or click on the document links below:

EU Shareholders - ISLA Response

EU Shareholders - John Picitto

EC Shareholders - ICGN Response

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The updated Code came into force on 1 January 2005. The main changes to the previous version have been to stress and amplify the following points:

• The Code applies to all participants in the market and their relevant staff, even though they may not have day to day operational responsibilities for securities lending. The need for at least annual refreshment of staff training and constant education.
• The discouragement of naked short selling.
• Credit assessment.
• Alternative trading systems.
• Discouragement of ‘Hold In Custody’ arrangements.
• The arrangements for dividends, corporate actions and, in particular, voting.

The code should be read in conjunction with the Introduction to Securities Lending which was published in Spring 2004 and may be downloaded from this site.

ISLA has played a major role in the revisions to the Code and will continue to monitor the need for further updates to reflect any changes in the market.

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ISLA is concerned that the new rules that become effective on 31st December 2004, FSA Integrated Prudential Sourcebook (IPSB) PS 04/16, will have a significant effect on a UK insurance company’s ability to continue lending securities in certain fields.

The new Rule, contained in the IPSB – 4.3.37R states that for stock lending to be approved the counterparty must be "an authorised person or an approved counterparty". In the new rules the definitions of "authorised person" and "approved counterparty" effectively narrow the range of counterparties for Approved Stock Lending by removing non-UK ISD firms from the constituency. There is need for clarity in relation to an approved counterparty generally and in particular in respect of two types of lending, the Euroclear Lending programme and lending to US Broker dealers that insurers currently undertake.

ISLA wrote to the FSA on November 18th, 2004 to ask for clarity on these proposed rules.

Euroclear (EB) has also written to the FSA to request that UK Insurers that participate in the EB Securities lending and Borrowing Programme be granted a waiver in respect of PRU 4.4.37R.

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ISLA are pleased to announce the SLRC have approved and published the finalised UK Annex.

The publication follows two years or more of work by ISLA and SLRC members to address some of the abiguities arising in the UK market.

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At the start of 2003, The Bank of England’s Securities Lending and Repo committee established a sub-group with representatives from The London Stock Exchange, The London Investment Banking Association, The British Banker’s Association and ISLA. The goal was to produce an up-to-date publication on Securities Lending that would be available free of charge and for distribution as widely as possible. It was decided to outsource the writing of the document. Tenders were invited whereupon project was awarded to Securities Finance International.

'An Introduction to Securities Lending' has now been published.
CLICK HERE to view the contents and download.

Members click here for further background on the origins of the document.
Non-members please contact admin@isla.co.uk
 

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