COVID-19 has further exposed defective regulations, says ISLA CEO
20 April 2020 London
Image: Tashatuvango/Shutterstock.com
In light of the current COVID-19-fuelled market stresses, some regulations drafted to limit the risk exposures of funds and banks must be revised to avoid becoming yet another constraint on market liquidity, says the CEO of the International Securities Lending Association (ISLA).
Andrew Dyson has used his Reflections of the CEO blog to question whether rules limiting certain funds types from lending, such as UCITS, or the recent spate of short selling bans, are examples of regulators overstepping.
To the question of whether these rules have gone “too far”, Dyson argues: “There is some evidence to suggest that in order to meet today’s policy and economic aims, notably in a post-Brexit world, certain rules and regulations will need to be revisited.”
The need to amending stringent rules around UCITS funds’ ability to engage in securities lending has long been expounded by ISLA and other industry representatives.
Dyson further notes that the current liquidity crunch highlights the vital role that UCITS could play in easing that market stress if they were allowed.
“The absence of market liquidity that could come from UCITS funds through securities lending, will in our view be a material factor in limiting the success of the renewed efforts to develop a wider Capital Markets Union across Europe,” he explains.
On the recent short selling bans, which first came in March across certain markets in Europe and Asia, and were renewed last week, ISLA’s chief argues that it is “crucial” that investors are able to trade freely in the best interests of their clients.
“In our view, banning short selling removes an important outlet for investors to express sentiment, hedge positions and add to efficient price discovery,” Dyson adds.
His stance echoes the view of ISLA’s Council for Sustainable Finance, which published its first position paper earlier this month that highlighted a significant body of research suggesting short selling bans do not achieve their aims and undermine market stability in the long term.
Turning to banks’ ability to lend and share liquidity with one another, Dyson notes “there is no doubt that banks are better capitalised and able to withstand the on-going yet unprecedented events”.
“However", he adds, "examined through a different lens, I believe aspects of the current regulatory agenda potentially look out of step with the needs of today’s markets”.
Dyson references the September repo rate spike last year which many argue was an extreme example of market events colliding with clumsy attempts by regulators to keep banks at arm’s length, which resulted in banks unable to share vital liquidity over the third quarter end.
The severe spike in the overnight repo rate roused the Federal Reserve to engage in large financing operations which it had only just starting to step back from just as the COVID-19 pandemic upended US money markets once again.
Dyson also used the blog to take aim at incoming regulatory frameworks such as the Central Securities Depositories Regulation’s buy-in regime, due February 2021, which he describes as being “clunky at best”.
He adds: "Whilst I note the aspirational direction of CSDR, and understand the implementation of fines for failed trades as prudent and appropriate steps, I don’t necessarily see other significant and incremental benefits for our markets."
Andrew Dyson has used his Reflections of the CEO blog to question whether rules limiting certain funds types from lending, such as UCITS, or the recent spate of short selling bans, are examples of regulators overstepping.
To the question of whether these rules have gone “too far”, Dyson argues: “There is some evidence to suggest that in order to meet today’s policy and economic aims, notably in a post-Brexit world, certain rules and regulations will need to be revisited.”
The need to amending stringent rules around UCITS funds’ ability to engage in securities lending has long been expounded by ISLA and other industry representatives.
Dyson further notes that the current liquidity crunch highlights the vital role that UCITS could play in easing that market stress if they were allowed.
“The absence of market liquidity that could come from UCITS funds through securities lending, will in our view be a material factor in limiting the success of the renewed efforts to develop a wider Capital Markets Union across Europe,” he explains.
On the recent short selling bans, which first came in March across certain markets in Europe and Asia, and were renewed last week, ISLA’s chief argues that it is “crucial” that investors are able to trade freely in the best interests of their clients.
“In our view, banning short selling removes an important outlet for investors to express sentiment, hedge positions and add to efficient price discovery,” Dyson adds.
His stance echoes the view of ISLA’s Council for Sustainable Finance, which published its first position paper earlier this month that highlighted a significant body of research suggesting short selling bans do not achieve their aims and undermine market stability in the long term.
Turning to banks’ ability to lend and share liquidity with one another, Dyson notes “there is no doubt that banks are better capitalised and able to withstand the on-going yet unprecedented events”.
“However", he adds, "examined through a different lens, I believe aspects of the current regulatory agenda potentially look out of step with the needs of today’s markets”.
Dyson references the September repo rate spike last year which many argue was an extreme example of market events colliding with clumsy attempts by regulators to keep banks at arm’s length, which resulted in banks unable to share vital liquidity over the third quarter end.
The severe spike in the overnight repo rate roused the Federal Reserve to engage in large financing operations which it had only just starting to step back from just as the COVID-19 pandemic upended US money markets once again.
Dyson also used the blog to take aim at incoming regulatory frameworks such as the Central Securities Depositories Regulation’s buy-in regime, due February 2021, which he describes as being “clunky at best”.
He adds: "Whilst I note the aspirational direction of CSDR, and understand the implementation of fines for failed trades as prudent and appropriate steps, I don’t necessarily see other significant and incremental benefits for our markets."
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CSDR: ICMA vows to continue push for buy-in amendments, despite ESMA brush off
CSDR: ICMA vows to continue push for buy-in amendments, despite ESMA brush off
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