Page 15 - ISLA_SLReport_Aug2020_double

The scale of investments held by collective investment default. Today, it may be argued that the proliferation Another key by-product of this coalescence of
vehicles (including UCITS) and their actual participation of central clearing across many markets, combined with several markets around the theme of collateral, is a
in the lending markets (See Figs 3 & 4), continues to the progressive rollout of the Uncleared Margin Rules greater willingness to collaborate on joint initiatives,
look unbalanced (with collective investment vehicles (UMR) regulation in the derivatives world, is pushing particularly in the technology space. ISLA has
representing 44% of all lendable assets in lending traditionally disparate markets ever closer. already committed to work with other associations The future of the CMU
programmes whilst the latter is only 22%). In our This manifests itself in a number of ways. including ISDA on the development of a Common and Brexit are somewhat
manifesto that was published in December 2019 Domain Model (CDM), that will create cross-market
(Securities Lending to Support More Autonomous EU In a short paper published by the BoE on 10 June, standards for the description of trading assets intertwined, as the biggest
Capital Markets: Priorities for the Next 5 Years), we they observed that ‘Initial margin required by UK and life cycle events. This will allow our collective capital markets centre
argued the need for policy makers and regulators to CCPs increased in March, with the overall increase members to develop products and solutions that are
look closely at the link between the provision of market peaking at 31% compared to the average requirement underpinned by the agreed standards and protocols, within Europe takes up
liquidity and the long term success of the EU’s CMU earlier in 2020’. They also noted that the provision that in turn will drive efficiencies and cost savings a new offshore status in
project. We again highlighted the need to think actively of margin helped ensure that derivatives markets across the industry.
about how the EU 27 can effectively mobilise liquidity remained resilient throughout the recent market the coming months. We
across Europe, in our response to the report from the shocks. However, they did caution that these large As we turn towards the second half of this year and have already seen the
CMU High Level Forum published in June. Much of movements of liquidity around the financial system what 2021 might bring, it feels that many things we
that shortfall continues to be assumed by Sovereign contributed to a ‘dash for cash’, as some market took to be the norm in January and February have UK is unlikely to adopt
Wealth Funds (SWFs), who today represent some 16% participants had insufficient cash-like assets to changed out of all recognition. Working from home key elements of the
of available securities and circa 29% of all loans globally. meet actual or anticipated margin calls. This ‘dash for instance, had mixed support and buy-in before the
Their participation in the global securities lending markets for cash’ and ‘cash like assets’ was seen in securities pandemic. Today, this has become the mainstay of how settlement discipline
is a well understood feature of our markets, where lending markets, as the demand to borrow HQLA many firms and institutions function on a daily basis. regimes within CSDR,
liquidity provided (especially in fixed income markets) is spiked significantly in March. The following volumes-
an important source of trading and market liquidity. based graph looks at the US Treasury markets, and More broadly as regulators and policy makers begin and is implementing the
highlights how integral securities lending markets to think about the longer term implications of the SRD II through changes
Collateral has always played an integral part in our were to the continued provision of collateral assets pandemic, we will see changes to policy and focus.
markets, primarily as a risk mitigant against counterpart within the system. In Europe, we can already see how the sustainable to existing UK legislation
finance agenda is being increasingly seen as the rather than the wholesale
vehicle that the European Commission will use to
Fig 5: US Treasury Bonds On-Loan Source: DataLend deliver COVID changes. From an ISLA perspective, adoption of the Directive.
our decision to create the ISLA Council for
Sustainable Finance now seems increasingly timely,
700B
and will provide a strong platform for ISLA to engage inconsistent regulation whilst offering opportunities for
in this debate. some, also creates logistical and operational headaches
US Treasury Loan Balance (Quantity) 600B Europe takes up a new offshore status in the coming Split jurisdictional and differing regulatory regimes are of
for firms that have significant footprints in both
The future of the CMU and Brexit are somewhat
jurisdictional regimes.
intertwined, as the biggest capital markets centre within
months. We have already seen the UK is unlikely to
course nothing new, but it should be remembered that
less harmonisation tends to lead to one thing, additional
adopt key elements of the settlement discipline regimes
within CSDR, and is impementing the SRD II through
the form of charges we pay for everything, from cross-
changes to existing UK legislation rather than the
border mobile phone roaming charges, to management
wholesale adoption of the Directive.. This of course costs. Ultimately, these will filter down to all of us in
500B
Jan 20 Feb 20 Mar 20 Apr 20 May 20 Jun 20 Jul 20 was not necessarily unexpected, but fragmented and fees on our investment and pension portfolios.
14 * See Data Methodologies for full details on page 50 15