ISLA lists top five priorities in new manifesto
05 December 2019 London
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The International Securities Lending Association (ISLA) new manifesto has listed five priority areas where EU policymakers can help bolster the securities lending market as a well-regulated part of an EU captive market union. The manifesto saw ISLA share its views and recommendations on the design of an EU financial services framework that enables securities lending to play an integral part in supporting the development of stronger, more autonomous capital markets in Europe. According to ISLA, the best way to strengthen the ability for companies to tap EU capital markets financing is by increasing the supply of capital available in these markets. In its key recommendations on the capital markets union (CMU), ISLA advised EU policymakers to, in the short-term, review the current UCITS framework to allow them to further participate in securities lending. In addition, ISLA advised EU policymakers to provide better access to central clearing for UCITS funds to allow them to compete more broadly with other major trading blocks. Both of these things, ISLA suggested, could stimulate greater retail participation in EU capital markets and reduce growing dependence on the non-EU supply of securities. SFTR Issues relating to the Securities Financing Transactions Regulation (SFTR) were listed third on the priority list as ISLA said they aim to address data issues in SFTR implementation to get the full potential systemic risk picture. ISLA explained: The main issue will be that we expect 60 percent of all loans with an EU counterpart to be out of scope of the SFTR reporting regime, as many securities are lent from outside Europe. A significant piece of the overall securities lending data set could therefore be missing for a proper analysis of potential systemic risk, ISLA revealed. To address this data gap, ISLA has urged the European Commission (EC) to review SFTR reporting regime and move from dual-sided reporting to single-sided reporting by the borrower only. This would ensure that borrowers (who would be inside the EU) would be solely responsible for the reporting, ISLA explained. Additionally, ISLA encouraged the Financial Stability Board (FSB) to continue monitoring SFTR and ensure that securities lending actors in their jurisdictions adopt the legal entity identifier. ESG and mandatory prudential haircuts for securities lending Elsewhere in the manifesto, ISLA highlighted its belief that securities lending can play a key role in making capital markets in Europe align more broadly with the ethos of environmental, social and governance (ESG) investing. ISLA key recommendations on sustainable finance outlined that EU rules should empower investors to fully understand the role of their securities lending programmes in the context of their broader sustainable finance strategies. The association also recommended that EU guidance and/or rules should be developed or reviewed to build in safeguards to avoid securities lending being used to influence key votes. The last priority ISLA listed was to ensure further upcoming potential mandatory haircuts on securities finance transactions (SFTs) are fit for purpose and fully informed by complete data sets on SFT markets. It was recommended that EU policymakers should avoid imposing mandatory minimum haircuts on securities lending transactions, as ISLA suggested they will now help to address potential build-up or procyclicality of leverage in the non-banking sector. Should a mandatory approach be adopted, ISLA said it should first not be implemented until other initiatives to ensure adequate and complete data reporting are in place and second be introduced through market legislation, not via the planned 2020 bank capital package, as the associated noted that this is not the best vehicle to consider this question. ISLA said it believes the agenda provides a viable framework for further discussion with regulators and policymakers, as the new European Commission and Parliament formulate their agenda for the coming five years. ISLA noted that they would welcome any feedback or comments regarding its proposals, as they look to open up the debate on these important topics.
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