ISLA reaches out to member firms on GITA
19 July 2018 London
Image: Shutterstock
The International Securities Lending Association (ISLA) is reaching out to member firms in its attempts to improve its understanding of the securities lending market in Germany.
The German Investment Taxes Act (GITA), announced in January 2018 that it was to introduce a manufactured dividend tax.
In the wake of GITA 2018, a number of institutional investors either duly restricted their lending supply or withdrew completely from this market.
ISLA said that it worked closely with the German Tax Authorities and other relevant stakeholders to better understand the new rules and provide market participants with greater certainty around how the rules work and how to apply them.
On 15 May, the German Federal Ministry of Finance issued the final guidance on the application of GITA which gave further clarity.
The Manufactured Dividend Rule (MDR), for one, renders the income from securities lending and repos subject to German taxation at the rate of generally 15 percent in the hands of a lender and repo seller respectively, when such lender or repo seller is an investment fund.
ISLA stated: “Due to a lack of clear understanding across the industry, lenders may determine that the risk of lending securities is no longer low and therefore will withdraw from the market, rather than accept a higher level of risk or uncertainty.”
The final guidance clarifies that only transactions conducted over the dividend record date are in scope of the MDR. This is different from the draft which included both transactions conducted over the record date as well as the payment date.
The payment date notion was removed in the final guidance in response to the industry comments. This amendment is indeed welcomed, however, it is only a correction of a technical error contained in the draft and not a substantial change.
The final guidance also clarifies that, for the purposes of the MDR, a German branch of a foreign borrower is treated as a German borrower and a foreign branch of a German borrower is treated as a foreign borrower.
In addition, the section regarding central counterparty (CCP) securities lending programme (the Eurex Clearing section) has been expanded to provide conditions under which a CCP would not be treated as a relevant borrower/lender when interposed in a securities lending chain.
The most important condition is that the CCP informs each initial lender and borrower on the invoices/clearing vouchers pertaining to the each transaction that the withholding obligation, if any, was not transferred to the CCP, but rather remains with the initial borrower, and to include the names of the initial transaction parties in such clearance documents.
ISLA said: “Notwithstanding this work, we are aware that there still appears to be a certain element of disruption in this market associated with apparent limited supply in certain German names.”
It added: “This appears to be causing spikes in fee rates with other potential impacts around overall market liquidity and the cash execution markets. To better understand why this is happening, we are trying to build up a comprehensive picture of this market.”
The German Investment Taxes Act (GITA), announced in January 2018 that it was to introduce a manufactured dividend tax.
In the wake of GITA 2018, a number of institutional investors either duly restricted their lending supply or withdrew completely from this market.
ISLA said that it worked closely with the German Tax Authorities and other relevant stakeholders to better understand the new rules and provide market participants with greater certainty around how the rules work and how to apply them.
On 15 May, the German Federal Ministry of Finance issued the final guidance on the application of GITA which gave further clarity.
The Manufactured Dividend Rule (MDR), for one, renders the income from securities lending and repos subject to German taxation at the rate of generally 15 percent in the hands of a lender and repo seller respectively, when such lender or repo seller is an investment fund.
ISLA stated: “Due to a lack of clear understanding across the industry, lenders may determine that the risk of lending securities is no longer low and therefore will withdraw from the market, rather than accept a higher level of risk or uncertainty.”
The final guidance clarifies that only transactions conducted over the dividend record date are in scope of the MDR. This is different from the draft which included both transactions conducted over the record date as well as the payment date.
The payment date notion was removed in the final guidance in response to the industry comments. This amendment is indeed welcomed, however, it is only a correction of a technical error contained in the draft and not a substantial change.
The final guidance also clarifies that, for the purposes of the MDR, a German branch of a foreign borrower is treated as a German borrower and a foreign branch of a German borrower is treated as a foreign borrower.
In addition, the section regarding central counterparty (CCP) securities lending programme (the Eurex Clearing section) has been expanded to provide conditions under which a CCP would not be treated as a relevant borrower/lender when interposed in a securities lending chain.
The most important condition is that the CCP informs each initial lender and borrower on the invoices/clearing vouchers pertaining to the each transaction that the withholding obligation, if any, was not transferred to the CCP, but rather remains with the initial borrower, and to include the names of the initial transaction parties in such clearance documents.
ISLA said: “Notwithstanding this work, we are aware that there still appears to be a certain element of disruption in this market associated with apparent limited supply in certain German names.”
It added: “This appears to be causing spikes in fee rates with other potential impacts around overall market liquidity and the cash execution markets. To better understand why this is happening, we are trying to build up a comprehensive picture of this market.”
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