Through a digital lens
04 January 2022
Andrew Dyson, ISLA’s chief executive, speaks to SFT about industry highlights during 2021, the focus of the Association’s development activities and key lessons learnt over the past two years
Image: stock.adobe.com/Fuzzy
What were the standout events that most shaped the securities lending industry during 2021?
As I look back on 2021, I think it will be remembered in several ways.
After what had seemed a benign end to 2020, and the expectation that 2021 would see a return to some sort of normality after the market excesses in the early part of 2020, the financial community was jolted out of any complacency with the events surrounding GameStop. Quite simply, retail investors trading as a swarm were able to influence the direction of travel of what had previously been an almost unheard-of retail-based underperforming stock. The questions that GameStop posed caused concern across the regulatory community, both here and in North America, and led directly to the Securities and Exchange Commission’s (SEC’s) consultation on transparency in securities financing transaction (SFT) markets that was published in November. The ability of retail investors to potentially shape market outcomes in this way will force the regulatory community to think in new and novel ways about how markets behave.
The second standout event for me was the decision taken in the latter part of the year by the European Commission (EC) to defer the mandatory buy-in elements of the much-discussed Central Securities Depositories Regulation (CSDR) legalisation. After cross-association efforts to persuade the EC that this part of the regulation would run counter to what the legislation is designed to do, I feel this is something of a victory for pragmatism and the markets themselves.
The third key initiative I wish to mention is sustainability. Whilst ESG investing is now part of every element of the investment process, 2021 was the year that we moved from talking about the theory behind the intersection of ESG investing and securities lending to implementation of real solutions that provide tangible benefits to our members. Much of that work is now flowing through the Association, as ISLA’s technical working groups begin to deliver these outputs in the form of market best practice.
What were the primary risks and points of inefficiency confronting your members coming into 2021?
Reflecting on market efficiencies, I am immediately drawn to the work we have been doing with ISLA members around the implementation of CSDR. Although I mentioned previously that we welcomed the deferral of the mandatory buy-in element of CSDR, we must not forget that the fines regime will still come into force in early 2022. Failure rates in our markets remain stubbornly high and we have been working with our members to better understand what factors are driving the current environment.
One of the lessons that we learnt from the Securities Financing Transactions Regulation (SFTR) was that it is important for both sides of a trade to articulate key elements of a trade or life cycle event in a consistent and standardised way. This work has led directly to the creation of digital standards in the form of the ISLA Common Domain Model (CDM), which provides a consistent digitalised framework on which our market can build for the future.
What has been top of ISLA’s priority list in terms of regulatory engagement during 2021?
The end of the UK Brexit transition period on 31 December 2020 meant that we saw for the first time in 2021 what our post-Brexit world would look like. There has, of course, been much discussion on topics such as access to the single market for financial services and the odd scrap about fishing rights. From our perspective, we recognise that ISLA looks after member firms on either side of the Brexit divide. This means that we now must challenge two increasingly divergent regulatory and policy communities. One of our priorities is to ensure that we build those links with the UK authorities, but not at the expense of our relationships across Europe or our members.
If we look for a moment at the key themes coming out of ISLA’s core steering groups, I have been struck this year by how key strands link the various disciplines. Digitalisation is linking much of our legal work in the form of the ISLA Clause Library. Market best practice is, in turn, starting to define how we think about our markets through a digital lens. Similarly, ESG and sustainability are themselves shaping how we think about collateral as we solve multiple problems and challenges.
The sec finance industry has experienced two years of high market volatility and liquidity fluctuations, following the Q3 19 US repo spike, the impact of the Covid-19 pandemic and steps to drive post-Covid recovery. What are the key lessons learnt from this period?
As we look back over the past two years, there is no doubt that we have seen periods of intense market volatility. As a result, institutions and participants in our markets were, at times, tested to the extreme. Without any significant exception, the operational capacity and balance sheet strength of our industry withstood those tests well. It could be argued that the work that the regulatory community has done, since the financial crises of 2007-8, has led to a more robust financial system that is able to withstand these shocks.
As banks and other prudentially regulated entities effectively retreated from some elements of the markets, however, it fell on the regulatory community to step-in to provide that stability. One quote from early 2020 suggested that the US Fed had gone from being the lender of last resort to the market maker of last resort. From our perspective, it is vitally important that the regulatory community keep our markets open during periods of stress. Empirical evidence repeatedly underlines the importance of securities lending and short selling to effective price discovery and deep, transparent markets.
ISLA is one of five regional trade associations to join GASLA in September. What are your objectives as a founder member?
Globalisation is at times an overused word, but one of the key themes that has emerged during 2021 is that ISLA members are increasingly grappling with challenges that resonate globally. In that regard, it was important, as one of several regional securities lending associations, that we respond together to those changing demands and needs of our members. The Global Alliance of Securities Lending Associations (GASLA) provides a platform where we can speak with one voice on common or shared issues, where a single voice would benefit our members. I would also stress that each of the founding members of GASLA remain independent and focused on the needs of their members.
What is top of ISLA’s working agenda moving into 2022?
As we look towards 2022, I do hope of course that we see the return to some sort of normality across our personal and business lives. I hope to see the return of our ISLA events across Europe, including our flagship event in Vienna.
One of the tangible benefits of the pandemic has been the proliferation of flexible working. I believe this drives greater inclusion, as well as empowering individuals to achieve a better and more productive work-life balance. ISLA supports all forms of diversity and inclusion and, in part, we see our role as an agent for change across our member firms.
As we look at 2022, we have developed our priorities around four key pillars of education, adoption, implementation and maintenance as part of an overall theme of promoting best practice. Industry associations will increasingly play a role as custodian of standards, including best practice.
At a more detailed level, 2022 will see further work on digitalisation as well as the developing ESG agenda. I expect to see further collaboration with our fellow associations in these key areas as we solve for the broader community. Towards the end of 2021, we announced a much closer legal relationship with our friends at PASLA and I anticipate that that the collaboration will start to bear fruit in 2022 as we standardise country and regional annexes for ISLA’s Global Master Securities Lending Agreement (GMSLA) suite of documents.
As I look back on 2021, I think it will be remembered in several ways.
After what had seemed a benign end to 2020, and the expectation that 2021 would see a return to some sort of normality after the market excesses in the early part of 2020, the financial community was jolted out of any complacency with the events surrounding GameStop. Quite simply, retail investors trading as a swarm were able to influence the direction of travel of what had previously been an almost unheard-of retail-based underperforming stock. The questions that GameStop posed caused concern across the regulatory community, both here and in North America, and led directly to the Securities and Exchange Commission’s (SEC’s) consultation on transparency in securities financing transaction (SFT) markets that was published in November. The ability of retail investors to potentially shape market outcomes in this way will force the regulatory community to think in new and novel ways about how markets behave.
The second standout event for me was the decision taken in the latter part of the year by the European Commission (EC) to defer the mandatory buy-in elements of the much-discussed Central Securities Depositories Regulation (CSDR) legalisation. After cross-association efforts to persuade the EC that this part of the regulation would run counter to what the legislation is designed to do, I feel this is something of a victory for pragmatism and the markets themselves.
The third key initiative I wish to mention is sustainability. Whilst ESG investing is now part of every element of the investment process, 2021 was the year that we moved from talking about the theory behind the intersection of ESG investing and securities lending to implementation of real solutions that provide tangible benefits to our members. Much of that work is now flowing through the Association, as ISLA’s technical working groups begin to deliver these outputs in the form of market best practice.
What were the primary risks and points of inefficiency confronting your members coming into 2021?
Reflecting on market efficiencies, I am immediately drawn to the work we have been doing with ISLA members around the implementation of CSDR. Although I mentioned previously that we welcomed the deferral of the mandatory buy-in element of CSDR, we must not forget that the fines regime will still come into force in early 2022. Failure rates in our markets remain stubbornly high and we have been working with our members to better understand what factors are driving the current environment.
One of the lessons that we learnt from the Securities Financing Transactions Regulation (SFTR) was that it is important for both sides of a trade to articulate key elements of a trade or life cycle event in a consistent and standardised way. This work has led directly to the creation of digital standards in the form of the ISLA Common Domain Model (CDM), which provides a consistent digitalised framework on which our market can build for the future.
What has been top of ISLA’s priority list in terms of regulatory engagement during 2021?
The end of the UK Brexit transition period on 31 December 2020 meant that we saw for the first time in 2021 what our post-Brexit world would look like. There has, of course, been much discussion on topics such as access to the single market for financial services and the odd scrap about fishing rights. From our perspective, we recognise that ISLA looks after member firms on either side of the Brexit divide. This means that we now must challenge two increasingly divergent regulatory and policy communities. One of our priorities is to ensure that we build those links with the UK authorities, but not at the expense of our relationships across Europe or our members.
If we look for a moment at the key themes coming out of ISLA’s core steering groups, I have been struck this year by how key strands link the various disciplines. Digitalisation is linking much of our legal work in the form of the ISLA Clause Library. Market best practice is, in turn, starting to define how we think about our markets through a digital lens. Similarly, ESG and sustainability are themselves shaping how we think about collateral as we solve multiple problems and challenges.
The sec finance industry has experienced two years of high market volatility and liquidity fluctuations, following the Q3 19 US repo spike, the impact of the Covid-19 pandemic and steps to drive post-Covid recovery. What are the key lessons learnt from this period?
As we look back over the past two years, there is no doubt that we have seen periods of intense market volatility. As a result, institutions and participants in our markets were, at times, tested to the extreme. Without any significant exception, the operational capacity and balance sheet strength of our industry withstood those tests well. It could be argued that the work that the regulatory community has done, since the financial crises of 2007-8, has led to a more robust financial system that is able to withstand these shocks.
As banks and other prudentially regulated entities effectively retreated from some elements of the markets, however, it fell on the regulatory community to step-in to provide that stability. One quote from early 2020 suggested that the US Fed had gone from being the lender of last resort to the market maker of last resort. From our perspective, it is vitally important that the regulatory community keep our markets open during periods of stress. Empirical evidence repeatedly underlines the importance of securities lending and short selling to effective price discovery and deep, transparent markets.
ISLA is one of five regional trade associations to join GASLA in September. What are your objectives as a founder member?
Globalisation is at times an overused word, but one of the key themes that has emerged during 2021 is that ISLA members are increasingly grappling with challenges that resonate globally. In that regard, it was important, as one of several regional securities lending associations, that we respond together to those changing demands and needs of our members. The Global Alliance of Securities Lending Associations (GASLA) provides a platform where we can speak with one voice on common or shared issues, where a single voice would benefit our members. I would also stress that each of the founding members of GASLA remain independent and focused on the needs of their members.
What is top of ISLA’s working agenda moving into 2022?
As we look towards 2022, I do hope of course that we see the return to some sort of normality across our personal and business lives. I hope to see the return of our ISLA events across Europe, including our flagship event in Vienna.
One of the tangible benefits of the pandemic has been the proliferation of flexible working. I believe this drives greater inclusion, as well as empowering individuals to achieve a better and more productive work-life balance. ISLA supports all forms of diversity and inclusion and, in part, we see our role as an agent for change across our member firms.
As we look at 2022, we have developed our priorities around four key pillars of education, adoption, implementation and maintenance as part of an overall theme of promoting best practice. Industry associations will increasingly play a role as custodian of standards, including best practice.
At a more detailed level, 2022 will see further work on digitalisation as well as the developing ESG agenda. I expect to see further collaboration with our fellow associations in these key areas as we solve for the broader community. Towards the end of 2021, we announced a much closer legal relationship with our friends at PASLA and I anticipate that that the collaboration will start to bear fruit in 2022 as we standardise country and regional annexes for ISLA’s Global Master Securities Lending Agreement (GMSLA) suite of documents.
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