ISLA CSDR working group panel discussion
01 September 2020
SLT catches up with some of ISLA’s CSDR working group to assess the current state-of-play for CSDR in the wake of a further delay and lingering technical issues with the regime
Image: retrorocket/shutterstock.com
Panellists
Adrian Dale, Head of regulation and market practise, ISLA
Kristian Hayes, Vice president, EMEA projects and Solutions, State Street Global Markets
Anna De Winton, Senior manager, global markets tax projects, BNP Paribas
Andy Krangel, Director, agency securities lending product development, Citi
CSDR has been delayed again but the industry’s concerns remain unaddressed. Until regulators are willing to grasp the nettle on the flaws with the settlement discipline regime a delay alone will not solve the problems. Do you agree?
Adrian Dale: With COVID-19 and its associated historically unprecedented impacts to markets, economies and our daily lives, the delay is of course very welcome. However, by itself, it won’t solve the array of fundamental problems which made it impossible to implement without negative impact. Also, while taking a break from a problem and returning with a fresh perspective can sometimes be helpful, that doesn’t apply to the Central Securities Depositories Regulation (CSDR) as the foundation of the settlement discipline regime is the root cause.
It may be that we see proof of how difficult it is to make 1+1=3 when we consider how long markets have been waiting for regulatory clarifications. So yes, I do agree with your statement and sincerely hope that the level one text can be revised to align with the recent suggestions submitted to the European Securities and Markets Authority’s (ESMA) CDSR review.
Anna De Winton: We were very pleased to see the latest proposals for a delay, but just a delay without changes to the regime will not ultimately deal with industry concerns. We are hopeful that the authorities will take this opportunity to really re-examine whether all the measures as originally proposed meet their objectives, and make changes. The regime needs to genuinely improve discipline, whenever it is enacted.
Kristian Hayes: Yes, I would agree. At this point in time, I think it is fair to say that the scope of securities financing transactions impacted by the regime is all-encompassing. However, many would argue that there is a strong case for securities lending activities (loan/return/collateral) to be declared out-of-scope simply due to: The way lending activity is instructed in the market (often outside the defined T+2 market cycle); the fact that the majority of market-facing instructions are being managed through a clearing account at a bulk (multi-allocation or fund) level, as opposed to single-allocation or fund level; and the mechanisms we already have available and in place to mitigate and punish failing activity. These include rate increases, lending restrictions and client sale fail cost claims, etc.
Andy Krangel: I do not consider it correct to solely attribute these issues to the regulators. Securities finance settlement rates are far from perfect and the industry can also contribute to ongoing challenges. However, the nuances of the securities finance market and the different reasons why lenders and borrowers participate in the market are not always reflected in how regulation is drafted.
In relation to how securities finance trades the current drafted, CSDR regulation is not really suited to the market practice. However, it is welcome news that the regulators have asked participants for their views again and hopefully a more appropriate set of rules will be introduced.
ISLA’s CSDR working group has focused its efforts on opportunities to review how out-dated market practices could be updated. How has this gone and has SFTR helped change practices?
De Winton: The working groups provide a great space for discussion about how practices could improve, and to hear how peers deal with issues that we all have in common. The best practice guides that are being created out of those discussions are really useful output, and should lead to CSDR is being used as a vehicle for driving more efficiency in general. The Securities Financing Transactions Regulation (SFTR) was also a very useful building block in this process as it has led to an increased focus on data quality and early matching.
Krangel: Whenever I participate in an International Securities Lending Association (ISLA) working group it is always pleasing to see how all the participants in the lending chain work together to find the best solution possible for all parties involved. The CSDR working group was another great example of that. It is important that market practices work for all participants, otherwise there will be a reluctance for those with less benefit to work to those solutions.
Having said that, there is always a strong focus on the impact on beneficial owners as ultimately they are providing the market liquidity. To illustrate this one of the key items of focus for the CSDR working group was to look at the reasons behind failing transactions and come up with best practices to reduce that risk.
An example is failing loans. The working group understood that if a lender sold stock after agreeing to a loan it would be unreasonable to expect them to deliver on the loan and then buy them in when they couldn’t deliver. The best practice, therefore, focused on giving the borrower reasonable notice so that an alternative position could be located.
Dale: The ISLA CSDR Settlement Discipline (Sep 2019) paper contained approximately 60 proposals for improving practices. Those proposals have been addressed in further CSDR and best practice working groups with outcomes and conclusions being published in the ISLA handbook or related meeting minutes. Many aspects have also been addressed by vendors who either already had solutions in place or developed additional functionality.
SFTR will be helpful with some aspects of settlement efficiency that relate to counterparty reconciliation and notification. SFTR has also clearly increased standardisation and that momentum continues in the work we are doing on digitalising best practice as part of the Common Domain Model pilot, which will take us even further in defining practises that will ultimately solve many of the legacy issues identified.
Hayes: SFTR delivers greater transparency on our activities, which is great, but that does not guarantee that a transaction will settle on the intended date. Our approach has been to encourage member firms to consider how both SFTR obligations and CSDR impact affect their own execution practices (loan and return) and their associated transaction/instruction management controls.
Due to the way our industry currently operates — same day collateralisation, same-day execution, and relaxed fails management — we all appreciate that failing activity cannot be fully eradicated. However, we should all work collaboratively towards identifying trends and making changes to the way we operate, helping to minimise fail risk, fail volume and fail impact. We know that securities lending fails are typically caused by market mismatches (trade data and standing settlement instructions (SSI) differences), a lack of available inventory on ISD (borrowers do not have inventory to settle returns; lenders do not have inventory to settle loans) or delayed/late collateralisation. So, the key is for every firm to work towards minimising and preventing fails where it is possible.
The CSDR working group is made up of a suitable mix of small and medium-sized enterprises from both the lender and borrower communities. We have worked on reaching an ‘aspirational best practice’ consensus for the good of all parties while also recognising that every firm has different capabilities. Where possible, we are encouraging firms to be more flexible by utilising automation and vendor post-trade services to improve pre-matching on the transaction date, improve the timing of exposure agreement and collateralisation and move to a T+0 return model.
ISLA, ICMA and other industry stakeholders have repeatedly voiced reservations around the mandatory buy-in element of the regime. What should be done (either by regulators or market participants) to put this issue to bed?
Hayes: We need to continue to highlight the fact that the vast majority of securities lending-related fails do not actually cause any party significant harm or risk. This raises the question of why would either party (lender or borrower) wish to arrange a buy-in? From my perspective, if our members are managing their activities and their fails proactively, we should not see a high volume of fails that would age for more than three business days. Therefore, we should see a low volume of fails that could then lead to a mandatory buy-in.
Krangel: From a regulatory perspective the view of the working group was securities finance transactions should not be subject to mandatory buy-ins. This was articulated in the ISLA response to the regulator’s recent request for feedback. That doesn’t mean the securities finance industry doesn’t need to improve its processes and settlement rates. While failing returns may create an operational burden, the penalty regime should be a sufficient incentive for member firms to take action in that regard.
Additionally, securities finance trades already have adequate contractual protection for both parties to deal with failed deliveries and the mandatory buy-in regime adds no additional benefit.
The vast majority of stock loan movements that fail are standard returns where the lender continues to be compensated and does not need the stock to cover an underlying delivery. If there is a failed recall for a sale that goes to buy-in the beneficial owner’s end goal is to end up with a cash equivalent to sale proceeds. not to have to use a mandated buy-in agent to repurchase the stock.
Dale: ISLA continues to advocate that the use of SFTs in itself is a tool used to reduce settlement fails in the cash market and imposing mandatory buy-in’s on securities lending transactions will cause a major problem for market makers and liquidity providers.
Nevertheless, if the buy-in regime under article seven is to be adopted, regulators and policymakers must conduct a thorough impact assessment over a period and address the nuances via a formal public review before introducing it as mandatory.
De Winton: Mandatory buy-ins could be problematic for two reasons. Firstly, there remain significant uncertainties about how the regime should operate in the regulatory texts as we currently have them. Secondly, mandatory buy-ins are likely to cause issues of market dislocation in their current form and could significantly inhibit firms’ ability to fund themselves efficiently. We think the impact of buy-ins on the market as a whole, not simply as a post-trade mechanism, needs to be considered.
Regulators could bring in other, clearer, aspects of the regime first and then carefully study the impact they have on settlement discipline. If, after a suitable implementation period to clarify the gaps in the rules, improvement has not been seen, only then should mandatory buy-ins be introduced.
Obviously most of the work there is for the regulators to do, but market participants should both continue to engage constructively with the work to make the regime practical and workable and to make efforts to improve discipline without the need for mandatory buy-ins.
Among the concerns highlighted by ICMA on behalf of its members is that there is only one buy-in agent currently expected to be active when CSDR goes live. Do you have any concerns in this regard?
De Winton: Yes. The fact there is only one buy-in agent in the market is one of the practical issues and speaks to the wider uncertainties about how the regime is meant to work.
Krangel: This is a bigger issue for beneficial owners. Lack of competition in the buy-in agent space could lead to unnecessarily high costs for beneficial owners for a service they would hope to use infrequently.
In respect of lending transactions if we manage our business correctly we really shouldn’t get to a point where stock loan transactions themselves are subject to mandatory buy-in.
From an agent lender perspective, we would not agree a loan without sufficient position in the box and if the beneficial owner sold the stock pre-delivery of the loan that sale would take the box position and prevent the loan instruction going to market. If there is no matched loan instruction there is no mandatory buy-in.
In respect of returns, the working group agreed the best practice is to cancel failing returns prior to the mandatory buy-in date. This would apply to recalls as well. If a matched return is failing it is because the borrower is short so they should cancel and rebook when they have a position available.
If the return was a recall for a client sale the client sale would be bought in and the borrower would compensate the lender via a cash closeout. Adding another buy-in to the process adds no value.
Hayes: Yes. Due to the number of markets in-scope in the Europe, the Middle East and Africa (EMEA) region, the number of participants transacting, our industry and its members need access to more agents.
Unlike SFTR, CSDR does not require the development of a new mechanism to meet its requirements, but work is still needed to avoid its penalties. What should stakeholders be doing over the next year to avoid fines and buy-ins?
Dale: Although it’s true that CSDR doesn’t require specific developments, to avoid penalties and buy-ins many firms identified development work that would be needed. However, with the delay and potential review/amendments, it is difficult to develop without specification. Perhaps the best approach for many firms in the interim is to be involved with their relevant trade association in defining and aligning practices. it would also be prudent to analyse and identify potential development work so they are prepared for all eventualities.
Hayes: In many respects, it is a risk-versus-reward challenge for each business. Do nothing and expect to be impacted by fail penalties (credits & debits) on a daily basis or do too much and you could become an outlier in the market.
As I have mentioned previously, every member and every business needs to assess their own EMEA market activities with a view to making execution and operating model/workflow changes (including automation and vendor connectivity) to minimise penalty and buy-in risk.
Krangel: The industry needs to make better use of the current vendor solutions to reduce the risk of penalties caused by mismatching instructions. Participants should make it standard to make SSI part of the pre-trade process. This is only really viable with the use of vendor systems.
Additionally, borrowers need to be much more efficient in their inventory management. Lenders will have to accept returns for same-day settlement, where the market permits, so the borrower return is based on actual rather than predicted inventory.
De Winton: Adherence with CSDR is about improving processes and communication between firms in order to avoid incurring penalties and buy-ins, as well as developing robust systems to manage them. Market participants should study their own settlement discipline record and underlying causes of failures, to make as many improvements to their processes and controls as they can, in advance of the regime going live.
Some are advancing the argument that CSDR will actually be a boon for securities lending as it offers an effective way to avoid costly buy-ins. Do you agree?
Krangel: Potentially, yes. The penalty regime means the cost of failing on a delivery will be much higher so as a result, it may be more cost-effective to borrow short term to cover the delivery, so automated fails coverage programmes may become more attractive. This obviously will have to be weighed against the cost of the borrowing transaction i.e. fees, transaction costs and liquidity costs. These trades will potentially be very short term and of low value and the fee charged is likely to reflect that as the lender has to cover their transaction and operational costs and deliver a return on the trade.
De Winton: Securities lending has always played a key role in facilitating smooth market functioning and efficient settlement, so there is definitely a part for our industry to play in minimising the need for buy-ins, and that will likely become more important as the regime is implemented.
Hayes: Yes, potentially. If failing activity caused by inventory shorts ages above three days then delivering parties may look to borrow assets (short-term) to avoid further daily penalties or buy-in costs.
Dale: Whilst one perspective has lenders becoming nervous about the additional movement of their assets through securities lending, it is also true that this activity helps the market avoid penalties and buy-ins by providing additional liquidity.
Another perspective is that the positive effects of securities lending on market efficiency and its alignment with the desire of regulators to reduce settlement fails should qualify lending activity to be out-of-scope for settlement disciplines. When we consider how security lending transaction activity is identified to CSDs, it Certainly would be an easy way to identify what should be out of scope.
Adrian Dale, Head of regulation and market practise, ISLA
Kristian Hayes, Vice president, EMEA projects and Solutions, State Street Global Markets
Anna De Winton, Senior manager, global markets tax projects, BNP Paribas
Andy Krangel, Director, agency securities lending product development, Citi
CSDR has been delayed again but the industry’s concerns remain unaddressed. Until regulators are willing to grasp the nettle on the flaws with the settlement discipline regime a delay alone will not solve the problems. Do you agree?
Adrian Dale: With COVID-19 and its associated historically unprecedented impacts to markets, economies and our daily lives, the delay is of course very welcome. However, by itself, it won’t solve the array of fundamental problems which made it impossible to implement without negative impact. Also, while taking a break from a problem and returning with a fresh perspective can sometimes be helpful, that doesn’t apply to the Central Securities Depositories Regulation (CSDR) as the foundation of the settlement discipline regime is the root cause.
It may be that we see proof of how difficult it is to make 1+1=3 when we consider how long markets have been waiting for regulatory clarifications. So yes, I do agree with your statement and sincerely hope that the level one text can be revised to align with the recent suggestions submitted to the European Securities and Markets Authority’s (ESMA) CDSR review.
Anna De Winton: We were very pleased to see the latest proposals for a delay, but just a delay without changes to the regime will not ultimately deal with industry concerns. We are hopeful that the authorities will take this opportunity to really re-examine whether all the measures as originally proposed meet their objectives, and make changes. The regime needs to genuinely improve discipline, whenever it is enacted.
Kristian Hayes: Yes, I would agree. At this point in time, I think it is fair to say that the scope of securities financing transactions impacted by the regime is all-encompassing. However, many would argue that there is a strong case for securities lending activities (loan/return/collateral) to be declared out-of-scope simply due to: The way lending activity is instructed in the market (often outside the defined T+2 market cycle); the fact that the majority of market-facing instructions are being managed through a clearing account at a bulk (multi-allocation or fund) level, as opposed to single-allocation or fund level; and the mechanisms we already have available and in place to mitigate and punish failing activity. These include rate increases, lending restrictions and client sale fail cost claims, etc.
Andy Krangel: I do not consider it correct to solely attribute these issues to the regulators. Securities finance settlement rates are far from perfect and the industry can also contribute to ongoing challenges. However, the nuances of the securities finance market and the different reasons why lenders and borrowers participate in the market are not always reflected in how regulation is drafted.
In relation to how securities finance trades the current drafted, CSDR regulation is not really suited to the market practice. However, it is welcome news that the regulators have asked participants for their views again and hopefully a more appropriate set of rules will be introduced.
ISLA’s CSDR working group has focused its efforts on opportunities to review how out-dated market practices could be updated. How has this gone and has SFTR helped change practices?
De Winton: The working groups provide a great space for discussion about how practices could improve, and to hear how peers deal with issues that we all have in common. The best practice guides that are being created out of those discussions are really useful output, and should lead to CSDR is being used as a vehicle for driving more efficiency in general. The Securities Financing Transactions Regulation (SFTR) was also a very useful building block in this process as it has led to an increased focus on data quality and early matching.
Krangel: Whenever I participate in an International Securities Lending Association (ISLA) working group it is always pleasing to see how all the participants in the lending chain work together to find the best solution possible for all parties involved. The CSDR working group was another great example of that. It is important that market practices work for all participants, otherwise there will be a reluctance for those with less benefit to work to those solutions.
Having said that, there is always a strong focus on the impact on beneficial owners as ultimately they are providing the market liquidity. To illustrate this one of the key items of focus for the CSDR working group was to look at the reasons behind failing transactions and come up with best practices to reduce that risk.
An example is failing loans. The working group understood that if a lender sold stock after agreeing to a loan it would be unreasonable to expect them to deliver on the loan and then buy them in when they couldn’t deliver. The best practice, therefore, focused on giving the borrower reasonable notice so that an alternative position could be located.
Dale: The ISLA CSDR Settlement Discipline (Sep 2019) paper contained approximately 60 proposals for improving practices. Those proposals have been addressed in further CSDR and best practice working groups with outcomes and conclusions being published in the ISLA handbook or related meeting minutes. Many aspects have also been addressed by vendors who either already had solutions in place or developed additional functionality.
SFTR will be helpful with some aspects of settlement efficiency that relate to counterparty reconciliation and notification. SFTR has also clearly increased standardisation and that momentum continues in the work we are doing on digitalising best practice as part of the Common Domain Model pilot, which will take us even further in defining practises that will ultimately solve many of the legacy issues identified.
Hayes: SFTR delivers greater transparency on our activities, which is great, but that does not guarantee that a transaction will settle on the intended date. Our approach has been to encourage member firms to consider how both SFTR obligations and CSDR impact affect their own execution practices (loan and return) and their associated transaction/instruction management controls.
Due to the way our industry currently operates — same day collateralisation, same-day execution, and relaxed fails management — we all appreciate that failing activity cannot be fully eradicated. However, we should all work collaboratively towards identifying trends and making changes to the way we operate, helping to minimise fail risk, fail volume and fail impact. We know that securities lending fails are typically caused by market mismatches (trade data and standing settlement instructions (SSI) differences), a lack of available inventory on ISD (borrowers do not have inventory to settle returns; lenders do not have inventory to settle loans) or delayed/late collateralisation. So, the key is for every firm to work towards minimising and preventing fails where it is possible.
The CSDR working group is made up of a suitable mix of small and medium-sized enterprises from both the lender and borrower communities. We have worked on reaching an ‘aspirational best practice’ consensus for the good of all parties while also recognising that every firm has different capabilities. Where possible, we are encouraging firms to be more flexible by utilising automation and vendor post-trade services to improve pre-matching on the transaction date, improve the timing of exposure agreement and collateralisation and move to a T+0 return model.
ISLA, ICMA and other industry stakeholders have repeatedly voiced reservations around the mandatory buy-in element of the regime. What should be done (either by regulators or market participants) to put this issue to bed?
Hayes: We need to continue to highlight the fact that the vast majority of securities lending-related fails do not actually cause any party significant harm or risk. This raises the question of why would either party (lender or borrower) wish to arrange a buy-in? From my perspective, if our members are managing their activities and their fails proactively, we should not see a high volume of fails that would age for more than three business days. Therefore, we should see a low volume of fails that could then lead to a mandatory buy-in.
Krangel: From a regulatory perspective the view of the working group was securities finance transactions should not be subject to mandatory buy-ins. This was articulated in the ISLA response to the regulator’s recent request for feedback. That doesn’t mean the securities finance industry doesn’t need to improve its processes and settlement rates. While failing returns may create an operational burden, the penalty regime should be a sufficient incentive for member firms to take action in that regard.
Additionally, securities finance trades already have adequate contractual protection for both parties to deal with failed deliveries and the mandatory buy-in regime adds no additional benefit.
The vast majority of stock loan movements that fail are standard returns where the lender continues to be compensated and does not need the stock to cover an underlying delivery. If there is a failed recall for a sale that goes to buy-in the beneficial owner’s end goal is to end up with a cash equivalent to sale proceeds. not to have to use a mandated buy-in agent to repurchase the stock.
Dale: ISLA continues to advocate that the use of SFTs in itself is a tool used to reduce settlement fails in the cash market and imposing mandatory buy-in’s on securities lending transactions will cause a major problem for market makers and liquidity providers.
Nevertheless, if the buy-in regime under article seven is to be adopted, regulators and policymakers must conduct a thorough impact assessment over a period and address the nuances via a formal public review before introducing it as mandatory.
De Winton: Mandatory buy-ins could be problematic for two reasons. Firstly, there remain significant uncertainties about how the regime should operate in the regulatory texts as we currently have them. Secondly, mandatory buy-ins are likely to cause issues of market dislocation in their current form and could significantly inhibit firms’ ability to fund themselves efficiently. We think the impact of buy-ins on the market as a whole, not simply as a post-trade mechanism, needs to be considered.
Regulators could bring in other, clearer, aspects of the regime first and then carefully study the impact they have on settlement discipline. If, after a suitable implementation period to clarify the gaps in the rules, improvement has not been seen, only then should mandatory buy-ins be introduced.
Obviously most of the work there is for the regulators to do, but market participants should both continue to engage constructively with the work to make the regime practical and workable and to make efforts to improve discipline without the need for mandatory buy-ins.
Among the concerns highlighted by ICMA on behalf of its members is that there is only one buy-in agent currently expected to be active when CSDR goes live. Do you have any concerns in this regard?
De Winton: Yes. The fact there is only one buy-in agent in the market is one of the practical issues and speaks to the wider uncertainties about how the regime is meant to work.
Krangel: This is a bigger issue for beneficial owners. Lack of competition in the buy-in agent space could lead to unnecessarily high costs for beneficial owners for a service they would hope to use infrequently.
In respect of lending transactions if we manage our business correctly we really shouldn’t get to a point where stock loan transactions themselves are subject to mandatory buy-in.
From an agent lender perspective, we would not agree a loan without sufficient position in the box and if the beneficial owner sold the stock pre-delivery of the loan that sale would take the box position and prevent the loan instruction going to market. If there is no matched loan instruction there is no mandatory buy-in.
In respect of returns, the working group agreed the best practice is to cancel failing returns prior to the mandatory buy-in date. This would apply to recalls as well. If a matched return is failing it is because the borrower is short so they should cancel and rebook when they have a position available.
If the return was a recall for a client sale the client sale would be bought in and the borrower would compensate the lender via a cash closeout. Adding another buy-in to the process adds no value.
Hayes: Yes. Due to the number of markets in-scope in the Europe, the Middle East and Africa (EMEA) region, the number of participants transacting, our industry and its members need access to more agents.
Unlike SFTR, CSDR does not require the development of a new mechanism to meet its requirements, but work is still needed to avoid its penalties. What should stakeholders be doing over the next year to avoid fines and buy-ins?
Dale: Although it’s true that CSDR doesn’t require specific developments, to avoid penalties and buy-ins many firms identified development work that would be needed. However, with the delay and potential review/amendments, it is difficult to develop without specification. Perhaps the best approach for many firms in the interim is to be involved with their relevant trade association in defining and aligning practices. it would also be prudent to analyse and identify potential development work so they are prepared for all eventualities.
Hayes: In many respects, it is a risk-versus-reward challenge for each business. Do nothing and expect to be impacted by fail penalties (credits & debits) on a daily basis or do too much and you could become an outlier in the market.
As I have mentioned previously, every member and every business needs to assess their own EMEA market activities with a view to making execution and operating model/workflow changes (including automation and vendor connectivity) to minimise penalty and buy-in risk.
Krangel: The industry needs to make better use of the current vendor solutions to reduce the risk of penalties caused by mismatching instructions. Participants should make it standard to make SSI part of the pre-trade process. This is only really viable with the use of vendor systems.
Additionally, borrowers need to be much more efficient in their inventory management. Lenders will have to accept returns for same-day settlement, where the market permits, so the borrower return is based on actual rather than predicted inventory.
De Winton: Adherence with CSDR is about improving processes and communication between firms in order to avoid incurring penalties and buy-ins, as well as developing robust systems to manage them. Market participants should study their own settlement discipline record and underlying causes of failures, to make as many improvements to their processes and controls as they can, in advance of the regime going live.
Some are advancing the argument that CSDR will actually be a boon for securities lending as it offers an effective way to avoid costly buy-ins. Do you agree?
Krangel: Potentially, yes. The penalty regime means the cost of failing on a delivery will be much higher so as a result, it may be more cost-effective to borrow short term to cover the delivery, so automated fails coverage programmes may become more attractive. This obviously will have to be weighed against the cost of the borrowing transaction i.e. fees, transaction costs and liquidity costs. These trades will potentially be very short term and of low value and the fee charged is likely to reflect that as the lender has to cover their transaction and operational costs and deliver a return on the trade.
De Winton: Securities lending has always played a key role in facilitating smooth market functioning and efficient settlement, so there is definitely a part for our industry to play in minimising the need for buy-ins, and that will likely become more important as the regime is implemented.
Hayes: Yes, potentially. If failing activity caused by inventory shorts ages above three days then delivering parties may look to borrow assets (short-term) to avoid further daily penalties or buy-in costs.
Dale: Whilst one perspective has lenders becoming nervous about the additional movement of their assets through securities lending, it is also true that this activity helps the market avoid penalties and buy-ins by providing additional liquidity.
Another perspective is that the positive effects of securities lending on market efficiency and its alignment with the desire of regulators to reduce settlement fails should qualify lending activity to be out-of-scope for settlement disciplines. When we consider how security lending transaction activity is identified to CSDs, it Certainly would be an easy way to identify what should be out of scope.
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