The first two weeks of February have been eventful to say the least, as once again we have seen a series of updates and announcements from the global regulatory community regarding matters that are close to our markets as well as adjacent ones.
Whilst we are nearing some sort of conclusion in respect of the implementation of both SFTR and CSDR, there is still much to be done. This was highlighted in the submission of a letter by the Alternative Investment Management Association (AIMA) to the European Commission (EC) and the European Securities and Markets Authority (ESMA) on 14 January, regarding the scope of SFTR in respect of non-EU AIFs, and its conflict in relation to the drafting of the Level I text. In their responses on 10 February, they provided confirmation that “Non-EU AIFs (i.e. AIFs not established in the Union), are not subject to the obligations set out in Article 4(1) of SFTR, even if the AIFM is authorised or registered in accordance with Directive 2011/61/EU, except in respect of SFTs concluded in the course of the operations of a branch in the Union of the Non-EU AIF.” We of course welcomed this clarification, and note the clear but pragmatic approach adopted by both the EC and ESMA in resolving this apparent anomaly within the legislation. The role of the regulatory community is clearly important as we try and shape implementation that sits easily with both the letter and spirit of the legislation. Last week, we also received news that ESMA had published a Final Report actioning the postponement of CSDR until 1 February 2021. The details of the report gave clear indication that the authorities had reviewed the proposals outlined in the recent letter from ISLA and its fellow financial trade associations, and had acted accordingly.
As part of our own ongoing outreach programme around SFTR, ISLA held its first SFTR workshop event in Luxembourg earlier this week. The workshop allowed market participants, particularly from the investment management community to understand the common issues around compliance with Article 4, as well as how the market is thinking more broadly about issues such as the provision of LEIs . I believe these forums are vitally important in terms of sharing experiences and ideas amongst practitioners and other stakeholders, and working towards better and more efficient solutions.
The morning workshop session formed something of a prelude to the afternoon, when in collaboration with our friends at ALFI, we ran our second joint afternoon briefing for our respective members. BNP Paribas Securities Services provided exceptional facilities for an afternoon of debate and conjecture, that bought together participants from across the investment fund industry and securities lending value chain. Although the afternoon was one of two halves, led by ALFI and ISLA respectively, I was struck by how much the lines between products and businesses are blurring. This is being driven in part by the broader adoption of the new margin rules relating to uncleared derivatives. As waves 5 and 6 of UMR are progressively applied to funds with lower levels of AUM, for the first time many of these funds will be required to post collateral, and in turn receive margin. Here, the intrinsic link with securities lending is clear, and many institutional firms will be looking towards lending as part of their broader liquidity and collateral management infrastructure.
The message that I took away from the first part of the afternoon was that as markets converge, collateral and the efficient use of that liquidity are the binding factor.
As I have said in previous blogs, SFTR, CSDR and to an extent UMR are all manifestations of how regulators and policy makers reacted to the financial crisis, and were designed to address very specific concerns including transparency, inefficient and fragile settlement disciplines, and systemic risk considerations. However, as these various blocks of regulation finally arrive, they are emerging into a new era where investment fundamentals and retail investor sentiment appear to be changing. Much of this change is being led by the ESG debate and the role of sustainable finance more broadly, as governments grapple with the very real challenges of climate change. On 6 February, we saw a bold intervention from ESMA who published its Sustainable Finance Strategy. The Strategy sets out how ESMA will place sustainability at the core of its activities, by embedding ESG factors into its work. The key priorities for ESMA include transparency obligations, risk analysis on green bonds, ESG investing, convergence of national supervisory practices on ESG factors, taxonomy, and supervision.
At the launch of the Strategy, Steven Maijoor, the Chair of ESMA commented “The financial markets are at a point of change with investor preferences shifting towards green and socially responsible products, and with sustainability factors increasingly affecting the risks, returns and value of investments. ESMA, with its overview of the entire investment chain, is in a unique position to support the growth of sustainable finance while contributing to investor protection, orderly and stable financial markets.”
As we look at this new world, I see an interesting natural tension between the legacy rules-based approach to regulations such as SFTR and CSDR, and the values or principles driven ethos of a topic such as sustainable finance. Reconciling these quite different worlds will present both organisational and cultural challenges across our markets and beyond.
This week, we saw the Saudi Stock Exchange (Tadawul) and the Securities Depository Center (EDAA) solicit industry feedback on amended drafts to the country’s securities lending and short selling regulations. These changes are intended to bring the local regulatory environment in line with international best practices, whilst bolstering a level of competitiveness and activity. Given the limited timeline for submission, we have already engaged with our Middle East working group to gather industry consensus on these proposals; the outcome of this consultation could have important implications for liquidity and the development of regional capital markets.
Finally in concluding, I wanted to highlight the publication of our recent Securities Lending Market Report (12th Edition) on 6 February. In addition to our normal mix of macro-economic and market analysis as well as guest contributions, for the first time we have included a roadmap of the EU’s expected developments in 2020/22, and the potential implications for securities lending markets. This further compliments some of the themes that we have seen in recent times, but that are also on the political and regulatory horizon.
Andrew Dyson, CEO