Surveying success
23 January 2018
Securities lending associations around the world discuss the key issues in 2017 and what they will focus on over the next 12 months
Image: Shutterstock
RMA
What was the biggest development in your region in 2017?
There were a number of key developments during 2017, including the finalisation of the US stay rules for qualified financial contracts (QFCs) and the new US tax laws. There were also many developments in other jurisdictions that will impact US lending participants, such as the Bank Recovery and Resolution Directive and new German tax laws.
The biggest development in the US during 2017 was a general shift in the goals of US regulatory agencies. This shift has been predicated on the election of President Trump and a Republican controlled Congress. In June of 2017, the Treasury Department issued a review of financial regulations of banks and credit unions. In this review, the Treasury Department recommended using a more risk-sensitive measure for the standardised calculation of risk-weighted assets (RWA) and single counterparty credit limits (SCCL) for securities finance transactions (SFTs). In conjunction with the recently finalised Basel III standards, which adopted a new more risk-sensitive measure for the standardised calculation of RWA for SFTs, we anticipate some relief for the capital requirements associated with SFTs.
Additionally, we have seen a shift in the key personnel at US regulators including Jay Clayton (Securities and Exchange Commission chair), Joseph Otting (comptroller of currency), Jay Powell (Federal Reserve chair, effective February), and Randal Quarles (vice chair for regulation at the Federal Reserve). The expectation is that these new key regulators will move from a policy of gold plating global standards for US banks to a more balanced approach that will look at both safety and soundness principals as well as competitive impacts of regulations.
What impact did these developments have on US markets last year?
The impact to date has been minimal, but some hope has been restored in the US in regards to gaining relief on the cost of capital related to indemnification, as well as the potential for the SCCL to be far less disruptive to the market than would occur if the current proposal is adopted in its current state. However, we anticipate that these changes will take place over a number of years and the full impact will likely not be realised for some time.
What were the RMA’s biggest challenges last year and how did the association face them?
RMA’s biggest challenges continue to be twofold. First, engaging with key regulators on proposed regulation to provide feedback that ensures an acceptable outcome for the industry. Second, educating and informing our membership about potential changes to the industry. RMA’s legal, tax and regulatory committee and tax sub-committees continue to engage with key regulators and provide insightful comment letters. A perfect example of this is the comment letter related to the US stay rules for QFCs. Based on comments provided by RMA, the final rule in the US reflects changes to the original proposal that will result in significantly less disruption to the securities lending market and its participants.
We also continue to build on our industry outreach through our annual conference, operations and technology roundtable, institutional contacts meeting, and additional roundtables and workshops. We have worked closely with Debevoise and Plimpton to provide complimentary workshops and other activities for our members, such as the upcoming webinars on the final Basel rules.
Can you name a market driver in the US that industry players must be aware of in 2018?
Market participants must be aware of the potential for significant changes in routes to markets for securities lending transactions. This is a long-term trend and we will likely not see a single product or strategy replace the existing value chain. However, the potential for a central counterparty solution, peer-to-peer lending, and fintech solutions, such as blockchain technology, creating disruptions to the existing framework are all market drivers that industry participants should understand. The future of securities lending will require increased flexibility and enhanced tool boxes for all members of the value chain.
What will be the top securities lending trend this year?
The top trend in securities lending during 2018 will be the continued development and adoption of fintech solutions for SFTs. This development and implementation process is likely going to be an ongoing trend for a number of years, but the utilisation of blockchain technologies, machine learning, artificial intelligence, and robotics will have a far reaching effect on the industry for years to come. We anticipate that these technologies will significantly impact operations, trading, and distribution channels in the future. During our conference this past October, we had a panel on the impact of emerging technologies. Based on the industry response to this panel, it is clear that many participants are exploring how these technologies can impact their businesses.
SASLA
What was the biggest development in South Africa in 2017?
The implementation of the new debt instrument solution (DIS) project on the Strate TCS BaNCS market infrastructure product. Strate’s DIS project was the strategic project to replace Strate’s previous UNEXCor bond settlement system and migrate bonds securities onto the TCS BaNCS market infrastructure platform.
What impact did this have on the industry last year?
The project is a significant development for the South African market as it is not only a replacement of the current technology, but also the implementation of a new bond clearing, settlement and asset servicing model utilising a securities ownership register (SOR).
This technology introduced numerous benefits. Post trading and pre-settlement processes will be automated with DIS and major changes will be made to the settlement model, including a greater flexibility for multiple settlement runs throughout the day and the introduction of cash payments for capital events via the South African Reserve Bank.
What were SASLA’s biggest challenges last year and how did the association face them?
Firms are increasingly looking for solutions to help them meet and manage their reporting requirements under regulatory regimes such as the second Markets in Financial Instruments Directive, money market statistical reporting, and the Securities Financing Transactions Regulation. The association has been in close contact with the Financial Service Board (FSB) and other industry bodies to try simplify the regulatory reporting requirements.
What should South African industry players be most aware of 2018?
The Johannesburg Stock Exchange (JSE) will go live with the Integrated Trading and Clearing initiative (ITaC).The ITaC project is a multi?year programme of work focused on the introduction of an integrated solution for the JSE’s trading and
clearing services.
The FSB has recently issued a draft code of conduct that sets principles for parties involved in securities financing transactions (SFTs) and addresses some of the following topics:
Lending agents and their responsibilities
• Principles of conduct for parties to SFTs
• Margin and collateral requirements and mark-to-market applicable to SFTs
• Reporting obligations in respect of SFTs (reporting all transactions to a trade repository)
• Disclosure of SFT activities
One of the biggest challenges will be how to meet all of the regulations without breaching others—there are a number of potential conflicts as well as some requirements that are open to interpretation and so run the risk of being applied differently.
What will be the top securities lending trend this year?
As we look forward into 2018 and beyond, we believe that banks and dealers will continue to be more constrained in their ability to further intermediate in the market, which will increase the need to optimise their activities in every way possible. A potential avenue being discussed in the context of balance sheet efficiencies is the introduction of central counterparties (CCPs). CCPs will allow market participants to more efficiently net offsetting cash transactions as well as achieve material risk-weighted assets-related capital efficiencies.
PASLA
What was the biggest development in your region in 2017?
Given the plethora of active markets we have in Asia, no one item stands out on its own. What 2017 did show us was that each market continues to evolve. To mention a few developments that caught the attention of Pan Asia Securities Lending Association’s (PASLA) members and the executive committee:
• Philippine Stock Exchange looked to the market for input into their pending introduction of short selling and may consider revisiting their securities borrowing and lending (SBL) framework
• South Korea made changes to their short selling rules, specifically focusing on tighter controls over ‘overheated’ securities
• Securities and Exchange Board of India has been revising its Indian SBL framework as their ongoing initiatives look to encourage more onshore liquidity to its marketplace
• Hong Kong Stock Exchange continues to look at their delisting framework, which PASLA has taken an active interest in
• Taiwan amended criteria for eligible securities that can participate in SBL, certain other rules governing SBL rollovers and short sell daily controls were positively eased
• Malaysia added a Shariah-compliant sell and buying infrastructure for domestic managers, as well as modified up-tick rules and added a fails coverage facilitation model
PASLA has also seen the planning for shortening settlement cycles by Japan and Thailand, which will have certain unintended consequences for the onshore and offshore participants who lend/borrow in those respective markets.
What impact did this have on Asia last year?
None of the 2017 developments in themselves necessarily had a direct impact on flows around the region. Larger factors for Asian equities were mixed market volumes and lower spreads, similarly in other regions.
Speed of execution is becoming more important than ever, as global regulations impact participants in different ways.
For similar reasons, fixed income had positive trends in terms of volume of activity, especially if global high-quality liquid assets could be sourced in the Asia Pacific timezone that could facilitate balance sheet efficiencies or provide additional pools of collateral.
What were PASLA’s biggest challenges in 2017?
Again, there was no one big-ticket item this year that posed any serious impediment to the regional market.
One of our primary goals is the continuation of education in order to remove any evolving or remaining misunderstandings surrounding securities lending, especially as market sentiment changes. I think it’s fair to say that market participants in this region are not as well informed across the region given the number of nuances that exist across the nine open, two restricted and two actively developing markets that exist in Asia today.
It is key for regulators, authorities and exchanges to strike a balance between their desire to protect and serve local investors and the need for additional liquidity that can be provided by international participants.
In early 2017, PASLA introduced market groups for different executive committee members to manage. Where appropriate, members outside of the executive committee added their expertise. This widened the resources available to PASLA and contributed to a more active association. More progress will be discussed and assessed during our Hong Kong conference coming up in March.
Can you name a market driver in Asia that industry players must be aware of 2018?
In addition to the obvious regulatory drivers, one of the really positive announcements that came in 2017 was the fact that the MSCI Emerging Markets Index began adding China A shares to its constituent weightings from last June. While this has no direct consequence for lending Chinese securities, the additional wave of investment into local securities will naturally add pressure to the capital markets to look for ways to deploy products around the additional liquidity.
One thing is certain: China will continue to develop as demonstrated by the progress of Hong Kong Connect. Investors need to be patient and watchful.
What will the top securities lending trend be this year?
Market-wise, fixed income flows are set to continue especially with 10-year US treasury yield climbing to the highest level in more than nine months, a looming glut of bond supply from the US, the UK, Japan and Germany coincided with a surprise cut in purchases of long-dated Japanese government bonds by the Bank of Japan. Facilitating such flows from Asia (the start of the global day) will continue to be important.
Technology just cannot be ignored this year given institutions’ insatiable pursuit for greater efficiencies. Whether it is by automating certain aspects of trading, speed of execution, middle-office outsourcing or via the aggregation of data—technology will no doubt take this business to many new states of evolution in 2018 and beyond.
ISLA
ISLA had a busy 2017. Did regulation take up a lot more time for ISLA than usual?
Since the financial crises we have seen a very clear path around the development of regulatory oversight and implementation of regulation. Last year was something of a watershed in some ways with the market working, at times, almost exclusively on the second Markets in Financial Instruments Directive (MiFID II) implementation. Following closely behind MiFID II has been the increasing focus on the Securities Financing Transactions Regulation (SFTR), which will run throughout 2018.
However, and notwithstanding the considerable effort to get these major pieces of legislation either over the line or into project plans, SFTR probably marks the beginning of the end of the post-crisis regulatory agenda. So, although 2017 was probably our busiest year from a regulatory perspective, and 2018 will be equally challenging, I do see the world around regulation beginning to change.
What were ISLA’s biggest challenges last year and how did the association face them?
I would say that when looking back at 2017 I would judge our biggest challenge was being asked to look at multiple regulatory and legal work streams at the same time. In 2017, we were asked to engage on MiFID II, SFTR, the Bank Recovery and Resolution Directive (BRRD), as well as developing a pledge version of our master agreement. These activities demand resources, and understanding our member’s priorities have been key to success
this year.
What will the regulatory focus on securities financing be in 2018?
Inevitably, now that MiFID II is live we will move on to implementation of the SFTR. Once the technical standards are formally adapted into EU law we will be working with our members and other stakeholders to help a smooth run towards implementation in 2019.
Which EU market driver should your members be most aware of this year?
I would look at this in two ways. First, the SFTR could radically change how market participants engage with this market. With circa 60 percent of all outstanding loans coming from lending principals who will be outside of the reporting obligation, we could see these lenders taking a different stance towards Europe; especially if some of the proposed changes to the BRRD also gain momentum. The second way of looking at this question is simply one-word: Brexit. It is coming and will deliver changes.
What will be the top securities lending trend this year?
The word flexibility will be at the forefront of many discussions in my view. Borrowers are looking at increasingly varied ways of concluding securities loans and those lenders who can best match those requirements and demands could see greater flows of business.
What was the biggest development in your region in 2017?
There were a number of key developments during 2017, including the finalisation of the US stay rules for qualified financial contracts (QFCs) and the new US tax laws. There were also many developments in other jurisdictions that will impact US lending participants, such as the Bank Recovery and Resolution Directive and new German tax laws.
The biggest development in the US during 2017 was a general shift in the goals of US regulatory agencies. This shift has been predicated on the election of President Trump and a Republican controlled Congress. In June of 2017, the Treasury Department issued a review of financial regulations of banks and credit unions. In this review, the Treasury Department recommended using a more risk-sensitive measure for the standardised calculation of risk-weighted assets (RWA) and single counterparty credit limits (SCCL) for securities finance transactions (SFTs). In conjunction with the recently finalised Basel III standards, which adopted a new more risk-sensitive measure for the standardised calculation of RWA for SFTs, we anticipate some relief for the capital requirements associated with SFTs.
Additionally, we have seen a shift in the key personnel at US regulators including Jay Clayton (Securities and Exchange Commission chair), Joseph Otting (comptroller of currency), Jay Powell (Federal Reserve chair, effective February), and Randal Quarles (vice chair for regulation at the Federal Reserve). The expectation is that these new key regulators will move from a policy of gold plating global standards for US banks to a more balanced approach that will look at both safety and soundness principals as well as competitive impacts of regulations.
What impact did these developments have on US markets last year?
The impact to date has been minimal, but some hope has been restored in the US in regards to gaining relief on the cost of capital related to indemnification, as well as the potential for the SCCL to be far less disruptive to the market than would occur if the current proposal is adopted in its current state. However, we anticipate that these changes will take place over a number of years and the full impact will likely not be realised for some time.
What were the RMA’s biggest challenges last year and how did the association face them?
RMA’s biggest challenges continue to be twofold. First, engaging with key regulators on proposed regulation to provide feedback that ensures an acceptable outcome for the industry. Second, educating and informing our membership about potential changes to the industry. RMA’s legal, tax and regulatory committee and tax sub-committees continue to engage with key regulators and provide insightful comment letters. A perfect example of this is the comment letter related to the US stay rules for QFCs. Based on comments provided by RMA, the final rule in the US reflects changes to the original proposal that will result in significantly less disruption to the securities lending market and its participants.
We also continue to build on our industry outreach through our annual conference, operations and technology roundtable, institutional contacts meeting, and additional roundtables and workshops. We have worked closely with Debevoise and Plimpton to provide complimentary workshops and other activities for our members, such as the upcoming webinars on the final Basel rules.
Can you name a market driver in the US that industry players must be aware of in 2018?
Market participants must be aware of the potential for significant changes in routes to markets for securities lending transactions. This is a long-term trend and we will likely not see a single product or strategy replace the existing value chain. However, the potential for a central counterparty solution, peer-to-peer lending, and fintech solutions, such as blockchain technology, creating disruptions to the existing framework are all market drivers that industry participants should understand. The future of securities lending will require increased flexibility and enhanced tool boxes for all members of the value chain.
What will be the top securities lending trend this year?
The top trend in securities lending during 2018 will be the continued development and adoption of fintech solutions for SFTs. This development and implementation process is likely going to be an ongoing trend for a number of years, but the utilisation of blockchain technologies, machine learning, artificial intelligence, and robotics will have a far reaching effect on the industry for years to come. We anticipate that these technologies will significantly impact operations, trading, and distribution channels in the future. During our conference this past October, we had a panel on the impact of emerging technologies. Based on the industry response to this panel, it is clear that many participants are exploring how these technologies can impact their businesses.
SASLA
What was the biggest development in South Africa in 2017?
The implementation of the new debt instrument solution (DIS) project on the Strate TCS BaNCS market infrastructure product. Strate’s DIS project was the strategic project to replace Strate’s previous UNEXCor bond settlement system and migrate bonds securities onto the TCS BaNCS market infrastructure platform.
What impact did this have on the industry last year?
The project is a significant development for the South African market as it is not only a replacement of the current technology, but also the implementation of a new bond clearing, settlement and asset servicing model utilising a securities ownership register (SOR).
This technology introduced numerous benefits. Post trading and pre-settlement processes will be automated with DIS and major changes will be made to the settlement model, including a greater flexibility for multiple settlement runs throughout the day and the introduction of cash payments for capital events via the South African Reserve Bank.
What were SASLA’s biggest challenges last year and how did the association face them?
Firms are increasingly looking for solutions to help them meet and manage their reporting requirements under regulatory regimes such as the second Markets in Financial Instruments Directive, money market statistical reporting, and the Securities Financing Transactions Regulation. The association has been in close contact with the Financial Service Board (FSB) and other industry bodies to try simplify the regulatory reporting requirements.
What should South African industry players be most aware of 2018?
The Johannesburg Stock Exchange (JSE) will go live with the Integrated Trading and Clearing initiative (ITaC).The ITaC project is a multi?year programme of work focused on the introduction of an integrated solution for the JSE’s trading and
clearing services.
The FSB has recently issued a draft code of conduct that sets principles for parties involved in securities financing transactions (SFTs) and addresses some of the following topics:
Lending agents and their responsibilities
• Principles of conduct for parties to SFTs
• Margin and collateral requirements and mark-to-market applicable to SFTs
• Reporting obligations in respect of SFTs (reporting all transactions to a trade repository)
• Disclosure of SFT activities
One of the biggest challenges will be how to meet all of the regulations without breaching others—there are a number of potential conflicts as well as some requirements that are open to interpretation and so run the risk of being applied differently.
What will be the top securities lending trend this year?
As we look forward into 2018 and beyond, we believe that banks and dealers will continue to be more constrained in their ability to further intermediate in the market, which will increase the need to optimise their activities in every way possible. A potential avenue being discussed in the context of balance sheet efficiencies is the introduction of central counterparties (CCPs). CCPs will allow market participants to more efficiently net offsetting cash transactions as well as achieve material risk-weighted assets-related capital efficiencies.
PASLA
What was the biggest development in your region in 2017?
Given the plethora of active markets we have in Asia, no one item stands out on its own. What 2017 did show us was that each market continues to evolve. To mention a few developments that caught the attention of Pan Asia Securities Lending Association’s (PASLA) members and the executive committee:
• Philippine Stock Exchange looked to the market for input into their pending introduction of short selling and may consider revisiting their securities borrowing and lending (SBL) framework
• South Korea made changes to their short selling rules, specifically focusing on tighter controls over ‘overheated’ securities
• Securities and Exchange Board of India has been revising its Indian SBL framework as their ongoing initiatives look to encourage more onshore liquidity to its marketplace
• Hong Kong Stock Exchange continues to look at their delisting framework, which PASLA has taken an active interest in
• Taiwan amended criteria for eligible securities that can participate in SBL, certain other rules governing SBL rollovers and short sell daily controls were positively eased
• Malaysia added a Shariah-compliant sell and buying infrastructure for domestic managers, as well as modified up-tick rules and added a fails coverage facilitation model
PASLA has also seen the planning for shortening settlement cycles by Japan and Thailand, which will have certain unintended consequences for the onshore and offshore participants who lend/borrow in those respective markets.
What impact did this have on Asia last year?
None of the 2017 developments in themselves necessarily had a direct impact on flows around the region. Larger factors for Asian equities were mixed market volumes and lower spreads, similarly in other regions.
Speed of execution is becoming more important than ever, as global regulations impact participants in different ways.
For similar reasons, fixed income had positive trends in terms of volume of activity, especially if global high-quality liquid assets could be sourced in the Asia Pacific timezone that could facilitate balance sheet efficiencies or provide additional pools of collateral.
What were PASLA’s biggest challenges in 2017?
Again, there was no one big-ticket item this year that posed any serious impediment to the regional market.
One of our primary goals is the continuation of education in order to remove any evolving or remaining misunderstandings surrounding securities lending, especially as market sentiment changes. I think it’s fair to say that market participants in this region are not as well informed across the region given the number of nuances that exist across the nine open, two restricted and two actively developing markets that exist in Asia today.
It is key for regulators, authorities and exchanges to strike a balance between their desire to protect and serve local investors and the need for additional liquidity that can be provided by international participants.
In early 2017, PASLA introduced market groups for different executive committee members to manage. Where appropriate, members outside of the executive committee added their expertise. This widened the resources available to PASLA and contributed to a more active association. More progress will be discussed and assessed during our Hong Kong conference coming up in March.
Can you name a market driver in Asia that industry players must be aware of 2018?
In addition to the obvious regulatory drivers, one of the really positive announcements that came in 2017 was the fact that the MSCI Emerging Markets Index began adding China A shares to its constituent weightings from last June. While this has no direct consequence for lending Chinese securities, the additional wave of investment into local securities will naturally add pressure to the capital markets to look for ways to deploy products around the additional liquidity.
One thing is certain: China will continue to develop as demonstrated by the progress of Hong Kong Connect. Investors need to be patient and watchful.
What will the top securities lending trend be this year?
Market-wise, fixed income flows are set to continue especially with 10-year US treasury yield climbing to the highest level in more than nine months, a looming glut of bond supply from the US, the UK, Japan and Germany coincided with a surprise cut in purchases of long-dated Japanese government bonds by the Bank of Japan. Facilitating such flows from Asia (the start of the global day) will continue to be important.
Technology just cannot be ignored this year given institutions’ insatiable pursuit for greater efficiencies. Whether it is by automating certain aspects of trading, speed of execution, middle-office outsourcing or via the aggregation of data—technology will no doubt take this business to many new states of evolution in 2018 and beyond.
ISLA
ISLA had a busy 2017. Did regulation take up a lot more time for ISLA than usual?
Since the financial crises we have seen a very clear path around the development of regulatory oversight and implementation of regulation. Last year was something of a watershed in some ways with the market working, at times, almost exclusively on the second Markets in Financial Instruments Directive (MiFID II) implementation. Following closely behind MiFID II has been the increasing focus on the Securities Financing Transactions Regulation (SFTR), which will run throughout 2018.
However, and notwithstanding the considerable effort to get these major pieces of legislation either over the line or into project plans, SFTR probably marks the beginning of the end of the post-crisis regulatory agenda. So, although 2017 was probably our busiest year from a regulatory perspective, and 2018 will be equally challenging, I do see the world around regulation beginning to change.
What were ISLA’s biggest challenges last year and how did the association face them?
I would say that when looking back at 2017 I would judge our biggest challenge was being asked to look at multiple regulatory and legal work streams at the same time. In 2017, we were asked to engage on MiFID II, SFTR, the Bank Recovery and Resolution Directive (BRRD), as well as developing a pledge version of our master agreement. These activities demand resources, and understanding our member’s priorities have been key to success
this year.
What will the regulatory focus on securities financing be in 2018?
Inevitably, now that MiFID II is live we will move on to implementation of the SFTR. Once the technical standards are formally adapted into EU law we will be working with our members and other stakeholders to help a smooth run towards implementation in 2019.
Which EU market driver should your members be most aware of this year?
I would look at this in two ways. First, the SFTR could radically change how market participants engage with this market. With circa 60 percent of all outstanding loans coming from lending principals who will be outside of the reporting obligation, we could see these lenders taking a different stance towards Europe; especially if some of the proposed changes to the BRRD also gain momentum. The second way of looking at this question is simply one-word: Brexit. It is coming and will deliver changes.
What will be the top securities lending trend this year?
The word flexibility will be at the forefront of many discussions in my view. Borrowers are looking at increasingly varied ways of concluding securities loans and those lenders who can best match those requirements and demands could see greater flows of business.
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