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Reflections of the CEO

The past two weeks have been a real contrast in many ways, with firstly the opportunity to participate in the annual IHS Markit Securities Finance Forum in London, followed more recently by the Second Arab Capital Markets Conference in Jordan. Although both the geography and the delegates at both events reflected the very diverse reach of the Association, I was struck by how many concerns, challenges and opportunities were common to both groups.

At the IHS Market Securities Finance Forum on 20th March , I moderated a panel that encompassed all elements of our market; institutional investors through to agent and prime intermediaries, and ultimately the end consumer. Despite reports of 2018 being a record year for revenues, the mood around 2019 was less positive. There was a sense that the risk reward ratio is not working for some institutions, with quite simply the feeling that they are not currently recompensed for the risk they run in their programmes. This idea is to an extent supported by some of our own analysis. In our 10th edition of the ISLA Securities Lending Market Report, we noted that prior to the year end, on-loan balances fell in respect of government bonds. One interpretation of this fall could be that as rates to borrow these securities fell, clients who had minimum threshold requirements set within their programmes saw these securities recalled. Within agent banks, the focus appears to be on the development of the product tool box to accommodate forms of business such as pledge and central clearing that could potentially ease the burden of capital costs within the transaction flow. Finally, from a hedge fund perspective, the first quarter of 2019 appears to have been tough for short side players, with limited opportunities in Europe and where opportunities have been identified, limited if any availability of the stock from lending pools.

Interestingly, the subject of ESG was discussed at some length in both London and in Amman. As we look towards the new European Commission and Parliament later this year, we know that the broad topic of sustainability will be on the agenda for both. From a lending perspective, we have to think about how we manage the natural tension that can exist around good corporate governance and lending. It is important that lending institutions have a clear ESG policy and ensure that their lending programme compliments rather than conflicts with it.

In the Middle East, sustainability also featured over the two days with a panel session considering how a market that is mainly comprised of small family run businesses, responds to the governance elements of this agenda, including diversity and effective transparency. As the region looks further out, is also sees similar challenges to the markets in Europe around the role and development of fintech, how data will be captured and held as well as emerging cyber security issues. From a securities lending perspective, the Middle East presents all of us with some of a conundrum.  Some of the largest global investors are located within the region and have actively participated in securities lending for many years, yet the regional domestic markets are underdeveloped. Many of the conference sessions touched upon the issue of market liquidity. The role that securities lending can play to help unlock these markets will be an important element to their overall success. We have already seen strong and positive moves in this direction within Saudi Arabia, along with the announcement from the authorities in Bahrain earlier this week to allow short selling and lending. 

ISLA is planning to return to the region either later this year or in early 2020 as part of our commitment to help securities lending develop more fully in the region.

It only remains for me to mention the long-awaited announcement of the publication of the SFTR RTS in the Official Journal of the EU.  Our specialist in-house SFTR team continue to work with the industry as we move ever closer towards the reporting obligation deadlines set out for 2020. 

Andrew Dyson, CEO

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