ISLA has described the sec lending industry as heading towards an ‘age of enlightenment’. Can you expand on what that means?
We are now at a point where we have a lot of regulations that are in-flight, currently being implemented or are about to hit our world. We know most of the detail behind the biggest regulations. There’s nothing new expected from the regulators in the sense of how they manage and control visibility into our market. So as we go through the implementation phase, we will reach what Kevin McNulty and I refer to as the ‘age of enlightenment’, which means we have a very clear regulatory environment with a lot of transparency that allows the market to go back to focusing on what it’s good at.
Having said that, there will always be updates to regulation because every now and again regulators need to see how well the existing framework is working and if it needs amending or tweaking.
What have been the major issues that ISLA has had to work through in the past 12 months?
There have been four substantial pieces of regulation that we’ve had to engage with over the last 12 months. The Central Securities Depositories Regulation (CSDR) will bring in mandatory fines and buy-ins, and we’ve consulted extensively on that.
The second is the Securities Financing Transparency Regulation (SFTR), which was brought in by the European Commission and finalised in June. There was a lot of work done in the run up to finalising the text, because some parts of the SFTR were quite hard on the market, but we did get some positive movement on those issues.
One of the biggest regulations is the rolling impact of Basel III, particularly the liquidity coverage ratio and the net stable funding ratio. We’ve done a lot of work on how those affect market participants and to see if there is any room for calibration of those ratios to make them more straightforward for securities finance.
Finally, we’ve been working on the implementation of the Bank Recovery and Resolution Directive, particularly the ‘stay’ provisions, which allow the regulators to suspend close-out rights under repo and securities lending agreements. Regulators already have, or are implementing, these powers at a regional level, but they’ve asked that those same powers be embedded in our agreements. It’s a long and complex process but we have to work on it.
Would you say this year has been one of your busiest in terms of the sheer volume of regulatory consultations you’ve had to deal with?
That’s fair. We’ve had six or seven big regulatory initiatives that we’ve responded to, either initial consultations or later in the process. We have had an ongoing dialogue with the Financial Stability Board (FSB) for two or three years. The CSDR in particular prompted a big response from us. At the same time, the rolling impact of Basel III, especially on broker-dealers, has resulted in a lot of engagement on our part. We have also done work on the capital markets union, UCITS, the Transparency Directive, the Markets in Financial Instruments Directive and the European Central Bank’s Money Market Statistical Reporting.
Is it the busiest year ever? It’s not far short.
Do you expect to be able to spend your time on other association tasks in the near future?
As an industry association, we’re responsible for many things, such as creating best practice, industry training, running standard market documentation and working with regulators and policymakers to try and ensure we have sensible, pragmatic and workable regulation for our industry. While you would expect that final point to be a major part of our role, for the past two years it’s pretty much dominated and, on occasion, that’s all we do for weeks at a time.
We would like to think that in a year or two that balance will swing back and we can do more of the best practice, training and general market development activities you would expect us to do.
Finally, CCPs having been one of this year’s hottest topics. What is ISLA’s stance on using CCPs or their place in the securities finance chain?
When the FSB did its first report on shadow banking, it didn’t suggest mandatory clearing for SFTs. Eurex Clearing does have a very well-developed central counterparty (CCP) model for our industry, which, because of the agency structure, is unique.
ISLA is quite neutral. We’re happy to explain to market participants how CCPs work and what the potential issues might be and create forums for people to discuss these issues. We help to create visibility for CCPs around what our members are doing. The market will decide if it the time is right to use the CCP, based on many issues around economics and capital efficiencies. We’re very supportive and believe it’s a part of the market that needs to develop—there’s inevitability there.
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