Transition, innovation, future state
25 June 2019
Find out what the big talking points were at ISLA’s 28th Annual Securities Finance and Collateral Management Conference in Madrid
Image: Shutterstock
This year’s International Securities Lending Association annual conference was held in Madrid, Spain. Although securities lending in Spanish securities is common practice, an opportunity which the industry watches closely is the relaxation of current restrictions that prevent local domiciled mutual funds from fully engaging in securities lending.
A panel at this year’s event suggested that there is “no good reason” why securities lending should not be done in Spain.
One panellist said the current restrictions prevent the growing market from fully capitalising on trading opportunities such as high-quality liquid asset lending.
Another speaker explained that if introduced, it would be a step closer to achieving a greater harmonisation across EU regulatory frameworks that address securities lending for similar fund types in other domiciles.
In terms of opportunities, one panellist noted that it would provide additional liquidity to the marketplace by making available securities that are “otherwise shut away in portfolios”.
The speaker added that it would also generate additional income for fund investors, which can be significant in respect of comparable fund performance.
A speaker suggested that there is a confidence this change can go through before the year ends. While another explained that “it is ready, we just need to get it on the agenda and signed off”.
It wouldn’t be a securities lending conference if the Securities Financing Transactions Regulation (SFTR) didn’t feature on the agenda. During his keynote speech, the European Securities and Markets Authority (ESMA) chair, Steven Maijoor said the reporting regime requires “important market preparations”.
Maijoor urged the audience that if they haven’t already started preparations for SFTR, “you should not delay, now is the time to get ready”.
The ESMA chair also explained the importance of responding to the SFTR guidelines, published at the end of May by the authority.
He said that the SFTR guidelines were published after the “positive experience” when publishing guidelines for the Markets in Financial Instruments Directive (MiFID).
He also encouraged industry members to attend the open hearing held by ESMA on 15 July to discuss the SFTR guidelines. Maijoor explained the importance of the input from the industry because, like previous consultations, ESMA considers adjustments in response to feedback from stakeholders.
When describing SFTR, Maijoor explained that the implementation of SFTR in the EU is “one of the final pieces in the post-crisis efforts by global regulatory authorities to be what used to be known as shadow banking activities into the light and transform these activities resilient market-based finance”.
Maijoor noted that SFTR is also “the most far-reaching and encompassing legislation” in terms of types of securities financial transactions (SFTs) and counterparties of all the global jurisdictions contributing to the Financial Stability Board’s data collection.
He said that, based on ESMA’s data strategy and all the experience gathered in recent years, “reporting frameworks such European Market Infrastructure Regulation and the Markets in Financial Instruments Regulation will mould the SFTR data around four major data building blocks, which include counterparty, loans and collateral, margin and re-use data”.
When it comes to future SFTR data, Maijoor said there are “high expectations that this will allow authorities to gain greater insight into SFT markets”.
Maijoor said: “In addition to financial stability monitoring, central banks will be able to rely on it to inform their monetary policy decisions. Prudential supervisors will more easily oversee the risks entailed by the liquidity and maturity transformation that can result from SFTs.”
“Regulators will also use the reported information to calibrate future potential regulatory requirements, such as the implementation of the Financial Stability Board haircut floors on non-centrally cleared SFTs.”
He added: “Moreover, authorities will be able to closely assess the build-up of leverage and interconnectedness in the financial system, as well as monitor the close links between interest rate swaps and repos.”
SFTR will also shed light on the reuse of securities and the reinvestment of cash collateral made by market participants and will enable authorities to better monitor the so-called collateral velocity, according to Maijoor.
He concluded: “As I hope I have made clear, large amounts of data now sit within securities markets regulators. Unfortunately, the development of analytical capabilities has lagged, mainly due to the limited resources available at both EU and national level. This has hampered a more widespread reliance on quantitative information, which has not been exploited so far to its fullest extent.”
Another panel, also discussing SFTR, suggested that backloading is a “tricky issue” and “will introduce practical issues”.
The panellist said: “SFTR doesn’t only require new trades to be reported but also trades that are already open on the go-live date.”
They explained: “There is a six months ‘grace period’ that ESMA has given for backloading.”
“Backloading only starts six months after go-live, which radically reduces the number of trades that need to be backloaded. That is positive but it also introduces some practical issues in particular reporting on a net exposure of a portfolio basis.”
In addition to SFTR, panellists also discussed other upcoming regulations, including the Central Securities Depositories Regulation (CSDR).
The moderator discussed the CSDR timeline and said that it has been something of a lengthy process involving lots of industry engagement.
It was indicated that there has been a delay to the CSDR deadline and that the September 2020 deadline will be delayed by a few months to a possible November date—although this has not yet been officially confirmed by regulators.
Another panellist said: “ESMA is taking a three stage approach to CSDR. Following the acceptance of Regulatory Technical Standards for settlement discipline, we shifted our priorities from advocacy to practical implementation so from a cash bond market perspective and also a repo market perspective.”
“We have mobilised a CSDR settlement discipline working group, which consists of traders—both cash bond and repo—and also operational experts, as well as legal and compliance representatives. It is predominantly sell side but increasingly we are seeing buy side members as well.”
“We are working on a number of things including designing a passport mechanism and we are also looking to update our buy in rules, which will be impacted by CSDR.”
Meanwhile, another panellist said that best practice is really important for driving CSDR forward and overcoming some of the settlement barriers will be a challenge.
A discussion around the Capital Markets Union (CMU) also took place on the second day of the event, with a panel suggesting that the industry lacks a place, whether it be physical or virtual, where issuers meet investors and have a hub on the continent that is comparable to London or New York.
The panel suggested that a CMU provides a reasonable basis to achieve that “hub”, but market participants need to take action.
One speaker suggested that it will not happen from one day to another but if there is a political will, then this needs to be encouraged by the players in the market as well.
A panellist suggested that the CMU is a framework that has an objective to “tear down some barriers to do more across national waters and align regulation”.
However, the panellist explained that the industry has to “overcome national interest and preferences”.
Another panellist said putting aside the political situation markets cannot deal with, or struggle to deal with, is the massive regional differences in the industry.
The panellist said: “If you look at the US market, it is very efficient, it is a one-stop-shop, it has regulation. I would push for the CMU and I would hope that it brings a one-stop-shop when it comes to the various regulations, the various challenges, the various reporting and various information that the politicians and regulators need.”
“In terms of opportunity, I’m not sure it creates a revenue perspective in terms of trading but it puts us all in the industry in place. We know what to do, we know what the regulations are, we know how to report, there will be one process and one chosen path.”
Another panellist explained that Brexit has forced Europe to do more on the CMU and move ahead, given that the largest capital market is leaving the EU.
The speaker commented: “We have also seen Paris competing against Frankfurt to be the next hub, which is positive. However, we also need some fundamental regulatory change as well because there are still issues around insolvency laws on the regulatory side because they are very different across jurisdictions making some business models very complicated.”
They added: “If you look at where firms in Europe go to get there funding, a lot of them go to the US to access the market there for funding rather than Europe, so we need to look at what can be done there to improve.”
“We also need to look at how we can incentivise asset owners in Europe to hold more long term debt rather than just government debt, so there is a lot that can be done.”
At the end of the panel, the audience was asked what they thought the single biggest impact would be on their business model over the next 24 months.
The majority of attendees (48 percent) thought new regulations such as SFTR, CSDR and the Capital Requirements Regulation would have the biggest impact.
Just under a quarter (24 percent) thought that geopolitical tensions and uncertainty would have the biggest impact, while 14 percent thought that Brexit would. Fintech received 7 percent of the vote, as did environmental, social and governance.
Environmental, social and governance (ESG) also featured on this year’s agenda at the conference. One panel warned that firms within the securities finance industry “need to act on ESG now”.
When asked if ESG is compatible with securities lending, the panel collectively agreed that it is, however, it needs to evolve.
One panellist explained that in the past it may have been neglected because of a lack of understanding, but times have changed.
During the panel the audience was asked if they thought the industry was doing enough to incorporate sustainability principles. Some 70 percent, thought that the industry is not doing enough and should be doing more.
Elsewhere, 17 percent thought that the industry is doing enough, while 13 percent thought that the industry is not doing enough but also should not be doing any more towards sustainability principles.
One speaker suggested that the increased focus on ESG investing is “raising the bar” for asset managers.
The speaker explained: “It is forcing more active ownership by fund managers and increasing the focus on engagement with companies. There has also been some question among certain ESG fund managers of whether securities lending and ESG can be combined.”
Another panellist noted that a common perception of securities lending is it facilitates shorting, and shorting is bad because it undermines the value of long-only portfolios. However, the speaker explained the notion that securities lending is incompatible with ESG because it facilitates short selling is a “misconception”.
The audience were also asked if regulation should play a greater role to change governance practices within the securities lending industry.
Some 76 percent thought that a combination of regulation and market-led initiatives is the best way to address changes in governance practices moving forward. However, 24 percent thought that this should be a market-led initiative.
A panel at this year’s event suggested that there is “no good reason” why securities lending should not be done in Spain.
One panellist said the current restrictions prevent the growing market from fully capitalising on trading opportunities such as high-quality liquid asset lending.
Another speaker explained that if introduced, it would be a step closer to achieving a greater harmonisation across EU regulatory frameworks that address securities lending for similar fund types in other domiciles.
In terms of opportunities, one panellist noted that it would provide additional liquidity to the marketplace by making available securities that are “otherwise shut away in portfolios”.
The speaker added that it would also generate additional income for fund investors, which can be significant in respect of comparable fund performance.
A speaker suggested that there is a confidence this change can go through before the year ends. While another explained that “it is ready, we just need to get it on the agenda and signed off”.
It wouldn’t be a securities lending conference if the Securities Financing Transactions Regulation (SFTR) didn’t feature on the agenda. During his keynote speech, the European Securities and Markets Authority (ESMA) chair, Steven Maijoor said the reporting regime requires “important market preparations”.
Maijoor urged the audience that if they haven’t already started preparations for SFTR, “you should not delay, now is the time to get ready”.
The ESMA chair also explained the importance of responding to the SFTR guidelines, published at the end of May by the authority.
He said that the SFTR guidelines were published after the “positive experience” when publishing guidelines for the Markets in Financial Instruments Directive (MiFID).
He also encouraged industry members to attend the open hearing held by ESMA on 15 July to discuss the SFTR guidelines. Maijoor explained the importance of the input from the industry because, like previous consultations, ESMA considers adjustments in response to feedback from stakeholders.
When describing SFTR, Maijoor explained that the implementation of SFTR in the EU is “one of the final pieces in the post-crisis efforts by global regulatory authorities to be what used to be known as shadow banking activities into the light and transform these activities resilient market-based finance”.
Maijoor noted that SFTR is also “the most far-reaching and encompassing legislation” in terms of types of securities financial transactions (SFTs) and counterparties of all the global jurisdictions contributing to the Financial Stability Board’s data collection.
He said that, based on ESMA’s data strategy and all the experience gathered in recent years, “reporting frameworks such European Market Infrastructure Regulation and the Markets in Financial Instruments Regulation will mould the SFTR data around four major data building blocks, which include counterparty, loans and collateral, margin and re-use data”.
When it comes to future SFTR data, Maijoor said there are “high expectations that this will allow authorities to gain greater insight into SFT markets”.
Maijoor said: “In addition to financial stability monitoring, central banks will be able to rely on it to inform their monetary policy decisions. Prudential supervisors will more easily oversee the risks entailed by the liquidity and maturity transformation that can result from SFTs.”
“Regulators will also use the reported information to calibrate future potential regulatory requirements, such as the implementation of the Financial Stability Board haircut floors on non-centrally cleared SFTs.”
He added: “Moreover, authorities will be able to closely assess the build-up of leverage and interconnectedness in the financial system, as well as monitor the close links between interest rate swaps and repos.”
SFTR will also shed light on the reuse of securities and the reinvestment of cash collateral made by market participants and will enable authorities to better monitor the so-called collateral velocity, according to Maijoor.
He concluded: “As I hope I have made clear, large amounts of data now sit within securities markets regulators. Unfortunately, the development of analytical capabilities has lagged, mainly due to the limited resources available at both EU and national level. This has hampered a more widespread reliance on quantitative information, which has not been exploited so far to its fullest extent.”
Another panel, also discussing SFTR, suggested that backloading is a “tricky issue” and “will introduce practical issues”.
The panellist said: “SFTR doesn’t only require new trades to be reported but also trades that are already open on the go-live date.”
They explained: “There is a six months ‘grace period’ that ESMA has given for backloading.”
“Backloading only starts six months after go-live, which radically reduces the number of trades that need to be backloaded. That is positive but it also introduces some practical issues in particular reporting on a net exposure of a portfolio basis.”
In addition to SFTR, panellists also discussed other upcoming regulations, including the Central Securities Depositories Regulation (CSDR).
The moderator discussed the CSDR timeline and said that it has been something of a lengthy process involving lots of industry engagement.
It was indicated that there has been a delay to the CSDR deadline and that the September 2020 deadline will be delayed by a few months to a possible November date—although this has not yet been officially confirmed by regulators.
Another panellist said: “ESMA is taking a three stage approach to CSDR. Following the acceptance of Regulatory Technical Standards for settlement discipline, we shifted our priorities from advocacy to practical implementation so from a cash bond market perspective and also a repo market perspective.”
“We have mobilised a CSDR settlement discipline working group, which consists of traders—both cash bond and repo—and also operational experts, as well as legal and compliance representatives. It is predominantly sell side but increasingly we are seeing buy side members as well.”
“We are working on a number of things including designing a passport mechanism and we are also looking to update our buy in rules, which will be impacted by CSDR.”
Meanwhile, another panellist said that best practice is really important for driving CSDR forward and overcoming some of the settlement barriers will be a challenge.
A discussion around the Capital Markets Union (CMU) also took place on the second day of the event, with a panel suggesting that the industry lacks a place, whether it be physical or virtual, where issuers meet investors and have a hub on the continent that is comparable to London or New York.
The panel suggested that a CMU provides a reasonable basis to achieve that “hub”, but market participants need to take action.
One speaker suggested that it will not happen from one day to another but if there is a political will, then this needs to be encouraged by the players in the market as well.
A panellist suggested that the CMU is a framework that has an objective to “tear down some barriers to do more across national waters and align regulation”.
However, the panellist explained that the industry has to “overcome national interest and preferences”.
Another panellist said putting aside the political situation markets cannot deal with, or struggle to deal with, is the massive regional differences in the industry.
The panellist said: “If you look at the US market, it is very efficient, it is a one-stop-shop, it has regulation. I would push for the CMU and I would hope that it brings a one-stop-shop when it comes to the various regulations, the various challenges, the various reporting and various information that the politicians and regulators need.”
“In terms of opportunity, I’m not sure it creates a revenue perspective in terms of trading but it puts us all in the industry in place. We know what to do, we know what the regulations are, we know how to report, there will be one process and one chosen path.”
Another panellist explained that Brexit has forced Europe to do more on the CMU and move ahead, given that the largest capital market is leaving the EU.
The speaker commented: “We have also seen Paris competing against Frankfurt to be the next hub, which is positive. However, we also need some fundamental regulatory change as well because there are still issues around insolvency laws on the regulatory side because they are very different across jurisdictions making some business models very complicated.”
They added: “If you look at where firms in Europe go to get there funding, a lot of them go to the US to access the market there for funding rather than Europe, so we need to look at what can be done there to improve.”
“We also need to look at how we can incentivise asset owners in Europe to hold more long term debt rather than just government debt, so there is a lot that can be done.”
At the end of the panel, the audience was asked what they thought the single biggest impact would be on their business model over the next 24 months.
The majority of attendees (48 percent) thought new regulations such as SFTR, CSDR and the Capital Requirements Regulation would have the biggest impact.
Just under a quarter (24 percent) thought that geopolitical tensions and uncertainty would have the biggest impact, while 14 percent thought that Brexit would. Fintech received 7 percent of the vote, as did environmental, social and governance.
Environmental, social and governance (ESG) also featured on this year’s agenda at the conference. One panel warned that firms within the securities finance industry “need to act on ESG now”.
When asked if ESG is compatible with securities lending, the panel collectively agreed that it is, however, it needs to evolve.
One panellist explained that in the past it may have been neglected because of a lack of understanding, but times have changed.
During the panel the audience was asked if they thought the industry was doing enough to incorporate sustainability principles. Some 70 percent, thought that the industry is not doing enough and should be doing more.
Elsewhere, 17 percent thought that the industry is doing enough, while 13 percent thought that the industry is not doing enough but also should not be doing any more towards sustainability principles.
One speaker suggested that the increased focus on ESG investing is “raising the bar” for asset managers.
The speaker explained: “It is forcing more active ownership by fund managers and increasing the focus on engagement with companies. There has also been some question among certain ESG fund managers of whether securities lending and ESG can be combined.”
Another panellist noted that a common perception of securities lending is it facilitates shorting, and shorting is bad because it undermines the value of long-only portfolios. However, the speaker explained the notion that securities lending is incompatible with ESG because it facilitates short selling is a “misconception”.
The audience were also asked if regulation should play a greater role to change governance practices within the securities lending industry.
Some 76 percent thought that a combination of regulation and market-led initiatives is the best way to address changes in governance practices moving forward. However, 24 percent thought that this should be a market-led initiative.
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