ISLA vents its concerns
21 April 2015 London
Image: Shutterstock
The International Securities Lending Association (ISLA) has expressed its concerns regarding the EU Proposal for Regulation on Reporting and Transparency of Securities Financing Transactions.
The European Commission’s proposal on securities finance transaction reporting was developed in response to the Financial Stability Board’s investigation into ‘shadow banking’.
The proposal will see market participants reporting to trade repositories to achieve more transparent markets. All counterparties doing business within the EU must report trades, including repo and securities lending and borrowing transactions.
Under the proposal, all UCITS and alternative investment funds must disclose more information about securities finance transactions to investors, while rules surrounding collateral rehypothecation will also change.
ISLA has claimed that the most technical, yet potentially most damaging, area for Securities Financing Transactions (SFTs) and the broader collateral markets (which include OTC derivatives transactions governed by credit support documentation) is the transparency of collateral reuse.
The proposal requires certain disclosure and consent requirements before collateral may be rehypothecated.
ISLA has claimed that broadening the scope from “rehypothecation” to “reuse” has introduced significant legal risks that would “undermine the use of title transfer collateral arrangements (TTCAs) on which SFT and other collateral markets heavily rely upon at present in Europe”.
Under a TTCA, the collateral-giver passes full title (full ownership rights) in the collateral to the collateral receiver; these ownership rights naturally include the right to reuse, or to sell, the collateral.
This mechanism gives the parties a high degree of legal certainty and protection should one of them default on its obligations.
ISLA commented: “The best outcome is to exempt TTCA from both disclosure and consent requirements in order to fully remove the [legal risk].”
In terms of transaction reporting to trade repositories, ISLA has stated that it supports detailed position level reporting of securities lending transactions as it will provide supervisors with “better quality, more quickly actionable, information for the monitoring of risks to financial stability”.
ISLA has also stated that it is fully in support of reporting requirements to investors.
The European Commission’s proposal on securities finance transaction reporting was developed in response to the Financial Stability Board’s investigation into ‘shadow banking’.
The proposal will see market participants reporting to trade repositories to achieve more transparent markets. All counterparties doing business within the EU must report trades, including repo and securities lending and borrowing transactions.
Under the proposal, all UCITS and alternative investment funds must disclose more information about securities finance transactions to investors, while rules surrounding collateral rehypothecation will also change.
ISLA has claimed that the most technical, yet potentially most damaging, area for Securities Financing Transactions (SFTs) and the broader collateral markets (which include OTC derivatives transactions governed by credit support documentation) is the transparency of collateral reuse.
The proposal requires certain disclosure and consent requirements before collateral may be rehypothecated.
ISLA has claimed that broadening the scope from “rehypothecation” to “reuse” has introduced significant legal risks that would “undermine the use of title transfer collateral arrangements (TTCAs) on which SFT and other collateral markets heavily rely upon at present in Europe”.
Under a TTCA, the collateral-giver passes full title (full ownership rights) in the collateral to the collateral receiver; these ownership rights naturally include the right to reuse, or to sell, the collateral.
This mechanism gives the parties a high degree of legal certainty and protection should one of them default on its obligations.
ISLA commented: “The best outcome is to exempt TTCA from both disclosure and consent requirements in order to fully remove the [legal risk].”
In terms of transaction reporting to trade repositories, ISLA has stated that it supports detailed position level reporting of securities lending transactions as it will provide supervisors with “better quality, more quickly actionable, information for the monitoring of risks to financial stability”.
ISLA has also stated that it is fully in support of reporting requirements to investors.
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