ISLA responds to ESMA’s SFTR consultation paper
06 August 2019 London
Image: Shutterstock
The International Securities Lending Association (ISLA) has responded to the European Securities and Markets Authority (ESMA) Guidelines for reporting under Articles 4 and 12 of Securities Financing Transactions Regulation (SFTR).
ISLA worked closely with a number of industry associations including the International Capital Market Association and the Association for Financial Markets in Europe.
Together, they coordinated respective submissions and aligned findings, feedback priorities and issues for escalation.
In the introductory comments for the responses, ISLA noted that it would like to draw ESMA’s attention to the potential restriction on the use of non-EU Issuer legal entity identifiers (LEIs) as detailed in the responses to questions 41 and 69.
ISLA said it would like to point out that “EU beneficial owners generally accept a diverse pool of collateral to reduce systemic risk, if the number of available securities is reduced; It may increase the risk profile of these businesses”.
“Impact financial stability by reducing overall market liquidity, creating market squeezes and a global wholesale market unwind via mass recalls. This will not just impact EU markets as all global capital markets will be impacted, particularly those with lower LEI adoption rates.”
“The impact on liquidity will not just be on the securities with no LEI’s but also the wider indexes which they form part of. It will reduce short covering in the market and restrict the ability of businesses to lend their pool of available assets.”
Additionally, ISLA highlighted that it may lead to an inability to hedge positions creating wider spreads and higher costs, and damage the competitiveness of UCITs/AIFs involved in securities lending and more generally reduce the return to EU based pension funds.
ISLA added that it may also potentially move businesses and their transactions to non-EU based locations.
Elsewhere in the responses, ESMA asked: “Which approach would you favour in terms of reporting cash-driven SLB?”
In response, ISLA said: “ISLA members are advising as best practice that companies should book the trades to the template that best fits and annotate the Master Agreement Type in the relevant field under which it is governed.”
“So for ‘reverse stock loans’ which are essentially a structured finance trade with all the hallmarks of a repo, [for examaple] loan of cash etc, report them in the repo template but reference the securities lending agreement in field 2.9 as the trade agreement. ”
ISLA explained: “ This was the conclusion, else these types of trades simply do not fit into the Stock Loan template as they are traditionally not the loan of stock (therefore cash).”
Meanwhile, as ESMA is set to publish their official responses to the consultation in Q4 this year, ISLA will focus on several key objectives and deliverable’s between now and go-live in 2020.
According to ISLA, this will include further engagement with all its various streams, including tri-party and vendor working groups to progress relevant discussions and publish content.
As well as this, ISLA will look to deliver best practice to members and broader industry stakeholders and direction on compliance with the reporting obligations through interpretation.
In due course, ISLA will publish a high-level road map that will outline these workstreams and deliverables.
Richard Colvill, SFTR analyst, ISLA commented: “This will provide a clear implementation path that will combine much of the valuable work we have done so far, whilst ensuring that we start to link our SFTR work with other important areas such as corporate actions and broader collateral harmonisation issues.”
ISLA worked closely with a number of industry associations including the International Capital Market Association and the Association for Financial Markets in Europe.
Together, they coordinated respective submissions and aligned findings, feedback priorities and issues for escalation.
In the introductory comments for the responses, ISLA noted that it would like to draw ESMA’s attention to the potential restriction on the use of non-EU Issuer legal entity identifiers (LEIs) as detailed in the responses to questions 41 and 69.
ISLA said it would like to point out that “EU beneficial owners generally accept a diverse pool of collateral to reduce systemic risk, if the number of available securities is reduced; It may increase the risk profile of these businesses”.
“Impact financial stability by reducing overall market liquidity, creating market squeezes and a global wholesale market unwind via mass recalls. This will not just impact EU markets as all global capital markets will be impacted, particularly those with lower LEI adoption rates.”
“The impact on liquidity will not just be on the securities with no LEI’s but also the wider indexes which they form part of. It will reduce short covering in the market and restrict the ability of businesses to lend their pool of available assets.”
Additionally, ISLA highlighted that it may lead to an inability to hedge positions creating wider spreads and higher costs, and damage the competitiveness of UCITs/AIFs involved in securities lending and more generally reduce the return to EU based pension funds.
ISLA added that it may also potentially move businesses and their transactions to non-EU based locations.
Elsewhere in the responses, ESMA asked: “Which approach would you favour in terms of reporting cash-driven SLB?”
In response, ISLA said: “ISLA members are advising as best practice that companies should book the trades to the template that best fits and annotate the Master Agreement Type in the relevant field under which it is governed.”
“So for ‘reverse stock loans’ which are essentially a structured finance trade with all the hallmarks of a repo, [for examaple] loan of cash etc, report them in the repo template but reference the securities lending agreement in field 2.9 as the trade agreement. ”
ISLA explained: “ This was the conclusion, else these types of trades simply do not fit into the Stock Loan template as they are traditionally not the loan of stock (therefore cash).”
Meanwhile, as ESMA is set to publish their official responses to the consultation in Q4 this year, ISLA will focus on several key objectives and deliverable’s between now and go-live in 2020.
According to ISLA, this will include further engagement with all its various streams, including tri-party and vendor working groups to progress relevant discussions and publish content.
As well as this, ISLA will look to deliver best practice to members and broader industry stakeholders and direction on compliance with the reporting obligations through interpretation.
In due course, ISLA will publish a high-level road map that will outline these workstreams and deliverables.
Richard Colvill, SFTR analyst, ISLA commented: “This will provide a clear implementation path that will combine much of the valuable work we have done so far, whilst ensuring that we start to link our SFTR work with other important areas such as corporate actions and broader collateral harmonisation issues.”
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