The final few days of any year offer the opportunity to reflect on the highs and lows of the past 12 months, and think about what the coming year may bring. Our industry and those of us who are part of it are no different. 2019 has been an interesting mix of the old and the new.
The journey we have all been on around SFTR and more recently CSDR, has at times crowded out almost everything else. The wait around implementation of these two key pieces of legislation however, is almost over. I have said before in this blog that some of the changes that we will see have been long overdue and will eventually create an industry that is better prepared for the challenges that we will face over the coming years.
Whilst both SFTR and CSDR demand an element of self-reflection, as an industry we are also not immune to broader macro-economic factors that will shape financial markets into 2020 and beyond. This first of these areas I would like to highlight is liquidity. As central banks have unwound their Quantitative Easing (QE) programmes by reducing their holdings of government bonds, this has effectively drained cash liquidity from the short-term money markets. In North America, this has led to the Federal Reserve intervening to provide short- term liquidity which many see as the return of QE, in all but name. The other factor that is cited by many commentators, is the post crisis regulatory regime that is designed to curb risk taking and thereby disincentivise banks to support trading liquidity, particularly across critical regulatory reporting dates. Although much of these broader market liquidity concerns are playing out in the repo markets, this raises important questions for securities lending, particularly as we look out towards the Capital Markets Union across Europe. Albeit for subtly different reasons, we can see clearly how an absence of liquidity can fundamentally undermine the operation of the government bond repo markets. Securities markets are in many ways no different. The provision of trading liquidity to market makers through access to securities lending allows them to actively make two way prices in securities without necessarily holding them as inventory. If Europe is to push ahead with its ambitious plans to develop a fully autonomous capital markets framework, the broader participation of institutional investors including UCITS funds will be of critical importance.
Aligned to the provision of market liquidity through securities lending, is its relationship with short selling. In my last blog, I spoke extensively about the decision by the Japanese Government Pension Investment Fund (GPIF) to withdraw from securities lending. Part of the rationale given by GPIF was the ‘short-termism’ of short sellers who seek profit from falling share prices. Needless to say we would not necessarily agree with that view, and it was encouraging to see the comments made by ESMA in their report on undue short-term pressure on corporations which was published on the 18th December. In the report, ESMA highlighted that short-selling and securities lending are key for price discovery and market liquidity. They also went on to conclude that ESMA is not aware of concrete evidence pointing to a cause-effect connection between these practices and the existence of undue short-term market pressures.
The second factor that is beginning to influence the future development of the investment management sector is ESG or the sustainable finance agenda. There are very real issues for our markets to grapple with as we look to support ESG funds effectively. Recognizing the importance of this topic, I was delighted that ISLA was able announce the formation of the ISLA Council for Sustainable Finance (ICSF) earlier this month. ICSF aims to introduce wide-ranging solutions for sustainable securities lending through the introduction of its Principles for Sustainable Securities Lending (PSSL). You will see further announcements and updates from ICSF as we go into 2020.
In closing, and as we come to the end of what has been a very diverse and at times challenging year for the industry, I wanted to acknowledge a number of key milestones and achievements that the Association has reached and accomplished during 2019.
From a regulatory perspective, the work of our in-house SFTR team as well as the various SFTR and CSDR focussed workstreams has been immeasurable. We are now actively developing market best practice, including dealing with life cycle events in a consistent way on a market wide basis.
Whilst the Association has collaborated on a number of initiatives, the recently published Master Regulatory Reporting Agreement (MRRA) was by far one of our most significant to date. Established with four other leading associations, and with representatives from both buy- and sell-side firms with expertise in derivatives and securities financing transactions, the MRRA gives market participants a single template for all reporting relationships across EMIR and SFTR, bringing greater efficiency and consistency to the regulatory reporting process.
In the past year, we have seen well over 1000 people come through the doors at our flag ship conferences as well as our various regional events, including Dublin and Munich. In February, we delivered our first ever joint event with ALFI in Luxembourg, with over 150 delegates in attendance.
Whilst the idea to revisit our marketing and communications strategy was conceived in 2018, it was in 2019 that the Association re-launched its website. The new site was designed to provide members, regulators, policymakers as well as wider industry stakeholders with a platform to access invaluable securities lending news, content and information.
Finally, December saw the Association achieve its first ever accolades; firstly at the SME News Finance Awards, including the Best Financial Management Engagement Platform, and then the Best Association Video at the Associations Awards 2019. As we step into a broader arena and compare ourselves across other industries and disciplines, this type of recognition is testament to the dedication and commitment of the growing team at ISLA.
I would like to thank our members for their continued support, and wish all of our readers a very prosperous 2020.
Andrew Dyson, CEO