The last two weeks have given me the opportunity to spend time with many of our members as well as broader industry stakeholders, at two quite different yet equally important events.
The first was one of the industry’s larger gatherings in the form of the annual Euroclear Collateral Conference 2019 in Brussels between 14 and 15 November. Then over the 21 and 22 November, a somewhat smaller group assembled in Barcelona as part of the GLC Europe Financial Markets Infrastructure Summit. Whilst both events looked to address potentially different audiences, I was struck at how many themes and issues were common to both groups, especially when you move away from product specific considerations and look more closely at the fundamentals that are driving change today.
In Brussels, there was much talk about the imminent arrival of new margin rules in respect of uncleared derivatives transactions for predominantly buy-side firms, in phases 4 and 5 of this legislation. This clearly presents challenges for many institutions who previously may not have either received or posted collateral, and may be a driver for further migration onto central clearing platforms. The role of securities lending in the context of these new rules was thrown into sharper focus as a possible component of a wider liquidity solution for those buy-side institutions. In contrast, several of the sessions in Barcelona looked at the wider implications of central clearing itself, and how the regulatory community is learning more about how they want to manage the systemic risk that many of these institutions represent.
It is interesting that in the post-crisis world, the arrival of central clearing is seen by many as a better and more robust alternative to OTC business. However, the scale and rapid growth in central clearing raises important risk and concentration questions for the regulatory community. Today, and notwithstanding the benefits that central clearing brings to our market, it is still under represented when it comes to the use of CCPs. Whilst borrowers seem very comfortable with this environment, lenders continue to show less appetite for executing securities lending transactions through a CCP. The debate surrounding the capital benefits attributable to facing a CCP all flowing to the sell-side community, are well known. l do feel however, that there is a broader perspective that we all need to think about, especially as derivative and collateralised markets tend to converge around the use of collateral. It will be interesting to see how the arrival of new and innovative products into this space, such as the specific model developed by Eurex Clearing to allow UCITS funds to participate in central clearing, will change the direction or travel or potentially speed it up.
Any commentary on our industry at this moment in time, would be deficient if it didn’t at least mention SFTR and CSDR. Whilst we are all still awaiting the revised Level III outputs from ESMA in respect of the Article 4 provisions within SFTR, a number of the sessions, including a very thought provoking presentation from the European Systemic Risk Board highlighted something which effectively brings together much our work, especially around best practice and the development of common domain languages. Quite simply, it’s all about data and data integrity.
During our visit to Brussels, we also took the opportunity to meet with a number of key contacts at the European Commission. The objective was primarily to update them on our work across the regulatory space, and to socialise many of the combined challenges that the industry is grappling with in terms of SFTR and CSDR compliance. I think it is vitally important that we maintain an open and frequent dialogue with the regulatory community, as ISLA can act as an important information and feedback conduit between them and the market. As part of this process, we have also been working extensively on the ISLA ‘Manifesto’. This document outlines some real and concrete proposals that we believe should form part of the new debate across the next Commission and Parliament, as we look to set a forward-looking agenda over the next three to five years. After those initial discussions in Brussels, we plan to publish these ideas more widely in due course.
With less fanfare, certainly than the very polished production in Brussels, the new ISLA Board met for the first time earlier this week. From my perspective, getting the right mix of people, firms, skills and experiences around that Board table can be a material factor in the longer term success of the Association. Those of you reading this update as ISLA members should remember that the Board is there to represent you and your markets, and help myself and the team move the industry forward. As I have said previously, the industry is at something of an inflection point as the current regulatory agenda comes to an end, and we can effectively take back control of our destiny’s. We should not miss that opportunity, and I am excited to work with the new Board as we look to define our future path.
Andrew Dyson, CEO