ISLA reveals wish-list of market reforms
26 September 2019 London
Image: Shutterstock
The International Securities Lending Association (ISLA) has warned the market that its current trajectory could cause costs and risks to rise to “potentially unsustainable levels,” in a whitepaper released this week.
In the paper titled ‘The Future of the Securities Lending Market | An Agenda for Change’, which was drafted in partnership with international law firm Linklaters, ISLA analysed the increasing complexities surrounding the securities lending market in terms of operational flows and systems, as well as pervasive and onerous regulatory imperatives.
“On the market’s current trajectory, costs and risks will continue to increase – potentially to unsustainable levels,” explained ISLA CEO Andy Dyson in the paper.
“The alternative is to recognise and engage with these changing conditions by standardising, automating and streamlining processes. This will yield significant future benefits, future-proof this vital industry and contribute to the smooth running of the global financial markets.”
As part of ISLA’s vision for the future, the paper outlined a series of solutions that the industry as a whole should put in place over the next two to five years, covering the eight stages of a stock loan transaction from pre-contractual know-your-customer (KYC) process all the way through to termination. The wish-list change includes:
Stage one: Pre-contractual
> Preparing standard KYC/ onboarding questions, with a prescribed format of response that would comply with the Securities Financing Transactions Regulation (SFTR) reporting requirements (where applicable).
> Consider solutions/vendors for the storage of certain basic information required as part of the KYC/onboarding process, particularly standard settlement instructions (SSIs).
Stage two: Contractual – master agreement
> Preparing standard drafting for certain provisions or changes typically made to the global master securities lending agreement (GMSLA) as part of a bilateral negotiation.
> Host the GMSLA and related documentation on an electronic negotiation and execution platform.
> Consider the ways in which logic from the ISLA commissioned legal opinions could be integrated into an automated process flow, to allow for the implementation of the considerations arising from that opinion in order to ensure opinion coverage for a specific relationship or transaction.
Stage three: Contractual – loan
> The development of a common domain model to represent digitally the key features and life cycle events of transactions.
> Automating the process of SFTR report generation and loan data validation between market participants.
> Driving a reduction in complexity in systems integrations and translation through the adoption of common standards.
Stage four: Allocation
> Developing automatic systems which provide feedback to borrowers on allocation on as close to an instantaneous basis as possible.
Stage five: Commencement
> The development of a common domain model to represent digitally the key features and life cycle events of transactions.
> Increased use of existing market functionality which maximises settlement, including pre-matching.
Stage six: Performance and life cycle events
> Consider processes and tools for automatically generating SFTR reports.
> Develop best practice guidelines to promote the timely, effective and accurate management of life cycle events.
Stage seven: Enforcement
> The development of a common domain model to represent digitally events of default.
Stage eight: Termination
> The development of a common domain model to represent digitally the termination of a loan.
> Consider solutions/vendors for the storage or reconciliation of SSIs.
New CDM working group to form
ISLA also used the whitepaper to highlight the achievements of the International Swaps and Derivatives Association (ISDA), which has created a common domain model (CDM), which offers a single, common digital representation of derivatives trade events.
ISLA has proposed the formation of a similar solution that would help coordinate the industry's adoption of technological solutions for the securities financing markets and avoid the need for market participants to use potentially duplicative and inconsistent systems.
To this end, ISLA is creating a working group of market participants to drive and support the development of a CDM for the securities lending markets.
The full whitepaper can be read here.
In the paper titled ‘The Future of the Securities Lending Market | An Agenda for Change’, which was drafted in partnership with international law firm Linklaters, ISLA analysed the increasing complexities surrounding the securities lending market in terms of operational flows and systems, as well as pervasive and onerous regulatory imperatives.
“On the market’s current trajectory, costs and risks will continue to increase – potentially to unsustainable levels,” explained ISLA CEO Andy Dyson in the paper.
“The alternative is to recognise and engage with these changing conditions by standardising, automating and streamlining processes. This will yield significant future benefits, future-proof this vital industry and contribute to the smooth running of the global financial markets.”
As part of ISLA’s vision for the future, the paper outlined a series of solutions that the industry as a whole should put in place over the next two to five years, covering the eight stages of a stock loan transaction from pre-contractual know-your-customer (KYC) process all the way through to termination. The wish-list change includes:
Stage one: Pre-contractual
> Preparing standard KYC/ onboarding questions, with a prescribed format of response that would comply with the Securities Financing Transactions Regulation (SFTR) reporting requirements (where applicable).
> Consider solutions/vendors for the storage of certain basic information required as part of the KYC/onboarding process, particularly standard settlement instructions (SSIs).
Stage two: Contractual – master agreement
> Preparing standard drafting for certain provisions or changes typically made to the global master securities lending agreement (GMSLA) as part of a bilateral negotiation.
> Host the GMSLA and related documentation on an electronic negotiation and execution platform.
> Consider the ways in which logic from the ISLA commissioned legal opinions could be integrated into an automated process flow, to allow for the implementation of the considerations arising from that opinion in order to ensure opinion coverage for a specific relationship or transaction.
Stage three: Contractual – loan
> The development of a common domain model to represent digitally the key features and life cycle events of transactions.
> Automating the process of SFTR report generation and loan data validation between market participants.
> Driving a reduction in complexity in systems integrations and translation through the adoption of common standards.
Stage four: Allocation
> Developing automatic systems which provide feedback to borrowers on allocation on as close to an instantaneous basis as possible.
Stage five: Commencement
> The development of a common domain model to represent digitally the key features and life cycle events of transactions.
> Increased use of existing market functionality which maximises settlement, including pre-matching.
Stage six: Performance and life cycle events
> Consider processes and tools for automatically generating SFTR reports.
> Develop best practice guidelines to promote the timely, effective and accurate management of life cycle events.
Stage seven: Enforcement
> The development of a common domain model to represent digitally events of default.
Stage eight: Termination
> The development of a common domain model to represent digitally the termination of a loan.
> Consider solutions/vendors for the storage or reconciliation of SSIs.
New CDM working group to form
ISLA also used the whitepaper to highlight the achievements of the International Swaps and Derivatives Association (ISDA), which has created a common domain model (CDM), which offers a single, common digital representation of derivatives trade events.
ISLA has proposed the formation of a similar solution that would help coordinate the industry's adoption of technological solutions for the securities financing markets and avoid the need for market participants to use potentially duplicative and inconsistent systems.
To this end, ISLA is creating a working group of market participants to drive and support the development of a CDM for the securities lending markets.
The full whitepaper can be read here.
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