Will ESG drive the “ultimate look-through” on borrowed securities?
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Will ESG drive the “ultimate look-through” on borrowed securities? 09 March 2021Hong Kong Reporter: Drew Nicol
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A strong desire for transparency in the lending chain to satisfy environmental, social and governance (ESG) agendas of beneficial owners could lead to the development of GPS technology for stocks, says PASLA/RMA panellists.
Offering visibility on what borrowers do with a lender’s stocks — most notably short selling — may be the only way to keep some Asia Pacific (APAC) lenders in the market, as shown by the case of Japan’s Government Pension Investment Fund, which withdrew from lending its foreign equities citing a lack of market transparency.
Hosting a panel to update Pan Asia Securities Lending Association (PASLA) and Risk Management Association (RMA) members on ESG and securities lending in APAC, Paul Solway, PASLA’s communications officer, explored the results of the trade body’s 2020 ESG survey which placed ‘lending chain transparency’ as the second most important factor, behind voting rights.
The prominence of this trend might lead to the development of the “ultimate look-through” tool, he suggested.
Solway, who primarily serves as BNY Mellon Markets’ APAC head of securities finance, asked panellists — made up of regional market stakeholders across the transaction chain — whether the introduction of the Securities Finance Transactions Regulation in the EU could be the first step on the ESG-driven march to tracking assets and their use by borrowers.
Stefan Kaiser, managing director at BlackRock, noted that the call for transparency stems from a wish to curb borrowers’ ability to pursue certain transactions with your assets, most notably utilising voting rights or short selling.
He added that codes of conduct in the UK and regulations in the US already exist to limit borrowers in their use of stocks, such as in voting, but otherwise lenders are unable to monitor their assets once they are out the door.
Kate Saulenas, portfolio analyst at Sunsuper, an Australian beneficial owner, welcomes the push for greater transparency down the lending chain but acknowledged that it's not always technically or commercially possible to observe beyond the first chain of counterparty risk.
Here, Leslie Lin, head of stock loan trading at Morgan Stanley, queried whether the best course of action is to create a GPS tracker for the stock or entrust the oversight of its use to the individual entities in the chain, namely the prime brokers and agent lenders.
Panelists agreed that existing intermediaries already often do most of the heavy lifting when it comes to vetting counterparties and the expansion of that role to include a more sophisticated ESG-screening process might be the most expedient option for the short term.
Compared to other regions, APAC markets are relatively restrictive in their short selling rules, with South Korea — a regional leader in driving securities lending revenue — among those maintaining a partial or complete ban on short selling long after similar rules were lifted in the EU, in the wake of the 2020 COVID-19 market shock.
South Korea is also leading the charge in clamping down on the perceived scourge of naked short selling in its capital market.
Elsewhere, Solway noted that Taiwan is an example of a market that could host a securities lending community but doesn’t due to market transparency concerns.
The complex relationship many APAC markets have with short selling and by proxy securities lending may mean innovation in transparency moves faster in this region than in others.
The opportunity that distributed ledger technology would afford the market in achieving greater transparency in this vein was not ignored by panellists, with several APAC markets hosting market-leading initiatives to introduce blockchain into various corners of the market, including securities lending.
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