The International Securities Lending Association (ISLA) has published a paper investigating the changes that will need to be made to the Global Master Securities Lending Agreement (GMSLA) to allow for market engagement with digital assets.
The paper, entitled ‘Preparing the Global Master Securities Lending Agreement (GMSLA) for an Evolving Digital Asset Landscape’, finds that there are elements both within and outside ISLA’s remit that need to be addressed. It states that there are three categories of issues related to digital assets, namely legal, commercial and documentation.
Legal issues consider how a digital asset is defined, including whether it comes under the scope of personal property rights and, if so, how these can be transferred. Additionally, this category covers how non-defaulting parties can exercise their rights in the transaction of digital assets following the default of a counterparty.
Commercial issues look at the extent to which digital assets can be used in securities lending transactions, and where the commercial and economic risks are allocated during transactions. The question of whether the economics of a digital asset securities lending transaction would be preserved, and how this would be achieved, is also considered.
Finally, documentation issues discuss amendments to existing securities lending documentation that may be needed when digital assets are involved.
ISLA makes a series of proposals in light of its research, emphasising the need to produce documentation that accommodates digital assets as loaned assets or collateral. It recommends that the 2010 GMSLA (Title Transfer) is addressed first, before the 2018 GMSLA Security Interest (‘Pledge’) is considered.
The association advocates for agnosticism towards which type of digital asset may be involved in the securities lending market, producing an approach that does not cater towards one specific category. If prioritisation is required, they suggest that digital securities (debt and equity), traditional securities that use distributed ledger technology, and tokenised securities are the first digital assets to be considered.
The paper recommends that market participants engage with ISLA’s working groups to further explore the issues that it raises, in order to ensure consistency and a ‘common direction of travel’ across the industry.
Finally, it states that amendments to the GMSLA are required, acknowledging that the issues that may be raised by the paper and subsequent discussions could produce operational complexities.
