Page 4 - ISLA SL Report March 2019
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      Dear Reader,

      I  am  delighted  to  welcome  you  to  the  latest  edition   budget or resourcing constraints. In this regard, I   explored in more depth in one of our two guest thought   integral to the successful adoption of these new rules.
      of the ISLA Securities Lending Market Report. In this   would also highlight the further changes that Central   leadership pieces.            We will of course follow this emerging story over the
      our 10th edition of the report, we continue to delve   Securities Depository Regulation (CSDR) will bring to                                  coming weeks and months as the quantum of collateral
      into how securities lending markets are behaving and   our industry.                               As we think more broadly about our markets, we cannot   to support them becomes clearer.
      what this means for market participants and interested                                             avoid the twin political drivers of the new European
      observers alike.                            The arrival of fines for settlement fails and mandatory buy-  Commission and European Parliament later this year, and   I would like to take the opportunity of this brief
                                                  in regimes will add a different dimension to our post trade   of course Brexit. We already know that the ESG agenda   introduction  to  thank  both  Pirum  Systems  and
      Inevitably, many of the structural issues that we see   world. From our perspective, securities lending markets   will  figure  heavily  within  the  new  Commission  and  it   IHS Markit for their insightful thought leadership
      affecting our markets have now been with us for some   in Europe have always dealt with both failing transactions   will be incumbent upon ISLA to work with the relevant   contributions  on CSDR and the future of relative
      time. In recent months however, we have seen some   and potential buy-ins in a clear and disciplined way.   stakeholders as this dialogue develops.   performance measurement respectively. Finally, I would
      significant  developments,  especially  on  the  regulatory                                                                                   also like to thank our data partners; IHS Markit,
      front. At the time of writing, the final scrutiny period of the   Under  our  master  agreement  (GMSLA),  any  failing   In addition, and notwithstanding the simple fact that   Datalend, FIS Global, JP Morgan Tri-party, Euroclear,
      Securities Finance Transaction Reporting (SFTR) by the   trade would normally attract a penal lending fee   Brexit may ultimately take one of several forms, there will   BNY Mellon Tri-Party, and Clearstream for their valued
      European Council and Parliament is nearing its end. This   thereby compensating the lender for the failing return,   be some form of separation between the UK and Europe   data inputs.
      means that our market can now expect to be sending the   whilst incentivizing the borrower to remedy the failing   over time. In the context of our markets, the role that
      first daily reports under Article 4 of the legislation to trade   trade quickly.                   securities lending plays by providing important trading
      repositories in mid-2020.                                                                          liquidity  will be more important  in a post-Brexit world
                                                  Similarly,  if  a  trade  continues  to  fail,  the  party  who  is   as Europe  develops  the Capital  Markets  Union  (CMU)
      As predicted in our last Securities Lending Market   being failed into has the option to initiate a buy-in of   agenda further.
      Report,  ISLA  is  devoting  considerable  resources  to   the position. This allows for a legal remedy without the
      this important initiative and I expect the Association to   need to impose a wider default against the counterparty.   Further in this report,  we highlight the important  role
      be  fully  committed  to  helping  the  industry  through  the   In  looking  at  the  specific  provisions  of  CSDR,  we  see   that securities lending plays around the mobilization of
      implementation process well into 2020.      many elements of our existing post trade structure,    High Quality Liquid Assets (HQLA). Today circa 45% of
                                                  however we are concerned that certain elements of the   all securities on-loan globally are HQLA. With demand   Andrew Dyson
      The shadow cast by SFTR could mean that other   mandatory buy-in structures could lead to unintended   for  this  asset  class  set  to  increase  with  the  arrival  of   CEO
      relevant legislation or business initiatives could either   consequences,  particularly  around  secondary  market   new uncleared margin requirements for derivatives   ISLA
      be missed or de-emphasized, potentially due to   liquidity is certain asset classes. The subject of CSDR is   transactions in 2020, the role of securities lending will be

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