As we head towards the final few days of one of the most extraordinary years in living memory, it is interesting to think what historians of the future will make of 2020. As the year began, most commentators seemed fixated on the seemingly endless Brexit debate in the UK, and the forthcoming US elections later on in the year. At that moment however, events were unfolding in mainland China that were about to change everything. During the month of January, there appeared to be little concern in Europe about the gathering COVID-19 storm, with the end of the month delivering one of those defining moments that will go down in history. At 11pm on 31 January 2020, the United Kingdom formally withdrew from the European Union, thereby signalling a new direction of travel for the country. Earlier that same day, the country reported its first two cases of coronavirus. Whilst it was not appreciated at that time, it was the second of these two events that would go on to define not only 2020, but potentially redefine many aspects of our lives for years to come.
What unfolded during February and March across Europe and latterly across the rest of the world, touched almost every single person on the planet, drawing in all elements of society as we grappled with a global health emergency not seen in a generation. At both a corporate and a personal level, much changed and at times very quickly. The wholesale adoption of working from home combined with the sudden proliferation of video meetings, created a new and very different business environment, creating permanent structural changes to the way we work. In some ways, COVID-19 simply accelerated trends that were already there, with areas such as the retail sector seeing some of the most pronounced changes as we further embraced on-line shopping. Our lexicon of vocabulary saw the addition of new words and phrases such as ‘social distancing’ and ‘the R number’.
COVID Implications for Financial Services
Financial services, although not at the epicentre of this crisis was not immune from feeling the full impacts of COVID-19, as markets reacted violently to the uncertainties that they were facing. Much has been written about how stock markets in particular bounced back in the second half of the year, with many of the losses seen early on in the crisis being recouped. As markets adjusted to these new norms, we also saw sudden and unprecedented moves in markets which defied traditional logic and thinking. These were mainly associated with news in respect of vaccines, which could not have been anticipated or predicted by the data-led quant strategies deployed by a number of alternative investment managers. To an extent, this highlights how reflective markets are of wider events, and from time to time deliver shocks that need to be managed and learnt from.
Somewhat closer to home, it was reassuring to be able to report to the regulatory community that the securities lending markets continued to function without any major operational or credit events during the period. On the contrary, we saw expediential growth in both trading volumes as well as margin calls. Notwithstanding that, some institutional clients did temporarily pause their lending programmes; these were isolated events rather than the wholesale withdrawal of market liquidity seen during previous crises. Whilst the reasons behind this are likely to be varied, the progressively transparent and detailed reporting provided to lenders will have been a material factor, allowing clients to make pragmatic and informed decisions.
Implementation of SFTR & Implications for Today’s Regulatory Agenda
Whilst there was much attention on the pandemic and how it affected our wider communities, we should not forget that 2020 also saw the introduction of the daily reporting of SFTs across Europe as part of the Article 4 requirements under SFTR. In any normal year, the introduction of something as complex and detailed as SFTR would have presented the industry with significant challenges. Trying to implement this in the midst of a global pandemic where entire businesses were working from home, led to IT development teams being redeployed from SFTR to support business continuity planning, which in turn put pressure on the roll out of SFTR and crucially end-to-end testing. Set against this backdrop, the delays to go-live reporting which pushed tier one firms out to July, now seemed minimal, especially when viewed against the journey that many of us have been on since the inception of this initiative in late 2012. In a blog published earlier this year, I considered how relevant something like SFTR is in both concept and construct, when judged by the needs of today’s world. As leverage fell away from the market during the period following the last financial crisis of 2007/08 and banks began to repair their balance sheets, we always knew that the next crisis would be in a different form to what had gone before. Consequently and as we fast forward to 2020, banks and other prudentially regulated entities are better placed to withstand the type of shocks that we saw earlier in the year. However, one of the perhaps unintended consequences of the rolling implementation of the Basel framework, is that quite simply banks take proportionately less risk today than they have done at any time in history. This has meant that so-called systemic risk that previously sat in the banking sector, has now effectively moved into the market, posing quite different questions for regulators and policy makers.
Rise of the Digital Agenda
The development of SFTR may also be the final incarnation of a form of regulatory reporting that relies heavily on the use of detailed reporting templates to gather the specific data points demanded by regulators . As we saw with our own SFTR initiative, this proved to be a lengthy and costly process. As SFTR came out of the hanger in July, it was entering a technical world where this approach already looks decidedly dated; market participants and regulators alike are embracing the digitalisation of financial services. Oddly and in some ways, the effort to standardise data inputs associated with SFTR has made is easier and more obvious for securities lending markets to take that additional step, with the development of a standard or common domain model (CDM). Much has already been said about how this technology will change our approach towards systems development, and how the market exchanges data in a more efficient and standardised way. From our perspective at ISLA, we firmly believe that the development of a cross-market and multi-business line CDM will harmonise data flows, reduce post trade costs, and allow for the rapid deployment of new products and services.
Environmental, Social & Governance & the Securities Lending Dilemma
If SFTR and the development of a CDM are likely to define the parameters of our market infrastructure in the coming period, then ESG is likely to be the single biggest ‘agent for change’ in the way we think about how securities lending programmes operate. In a post-COVID-19 world, it is already clear that investors are demanding different things from their investment portfolios, with a greater emphasis being placed on the wider green agenda. This change in sentiment is leading to greater scrutiny around how securities lending interacts with the core principles of an ESG-driven investment framework. Whilst acknowledging the importance of this debate, I would also like to highlight the well-developed themes of responsible stewardship that already exist across the investment community and address key areas that relate to securities lending programmes, including active shareholder engagement and proper social and environmental scrutiny. There is of course more to be done, and as the sustainable finance agenda gains further momentum, we are seeing concepts moving quickly to implementation, with the need to develop real and tangible solutions to support our industry through this transition. Aligned to this, 2020 saw the consolidation of our ongoing ESG efforts back within the core of the Association, enabling the full resources of our product and technical working groups and streams to be made available to deliver on our ambitious plans to develop best practice-led ESG solutions for our members and wider industry stakeholders. As we move into 2021, we will progressively be building ideas around our new ESG Policy Framework, that will align our regulatory, advocacy, thought leadership and best practice efforts under the overall direction of our newly established ESG Steering Group.
Adapting to New Norms
I have already mentioned how much of the service-based economy has had to rethink how it operates and communicates with its clients, since the onset of the pandemic. As an Association, we too have not been immune to these challenges, and at times significant headwinds. One of the most immediate and dramatic impacts of the global lockdowns was the cancellation of all of our face-to-face events in 2020, including our flagship conference in Vienna. As we looked at these changes, we judged that some represented not only immediate responses to the pandemic, but also reflected some underlying shifts in the way we have to think about our businesses, and in particular communication.
In terms of events and in line with others, 2020 was the transference of our efforts towards delivering virtual events and sessions. You will have seen our content-rich joint webinar series with Global Investor Group in the summer, and more recently our CDM Showcase event. As I think about this space more broadly and where the market appears to be heading, it is to not assume that a virtual event should simply replicate an in-person event in terms of its format and delivery. We need to use the opportunities afforded by new technologies to think creatively around delivery formats and what participants want from these sessions, as I feel the virtual event space will be a permanent feature across all industries for the foreseeable future.
Another factor that has become evident as we live our lives to a different drum beat, is the simple fact that consumers of content and messaging want to engage on their terms and to suit their schedules and priorities. From live streams to on-demand videos and pre-recorded podcasts, everyone is responding to evolving consumer sentiment and making content available in varied and flexible digital formats. Whilst these features are by no means a recent phenomenon, 2020 has certainly accelerated their growth across industries such as ours.
As I look to conclude, it is always tempting to forecast what the coming year will bring. If 2020 has taught us one thing however, that is to perhaps avoid speculating too much about future events and trends; something can arrive from nowhere and change everything!
ISLA – With the Market, For the Market
I think what we can take from 2020 is some reassurance that we are all a little more resilient than we thought we were. From the perspective of the Association, I feel confident that I have the right team around me to move forward with another bold and ambitious business plan. As some of the big regulatory initiatives come to a conclusion, this marks the end of a ten year regulatory journey that most of us across Europe have been on. In 2021, I see real opportunity to take back control of the direction of travel for our industry.
In closing, I would like to begin by thanking our members for their continued support, including those who have been so active across our various working groups and streams. As we embark on exciting new challenges in the year ahead, I am continuously drawn to a phrase used at our recent CDM Showcase that described ISLA as ‘working with the market for the market’. I would like to think this incapsulates exactly we endeavour to do. Having said that, it would not be possible without the participation and contributions from our members across every facet of the industry. Your input has and will continue to shape how we influence the future direction of travel for the securities lending markets in EMEA, as well as our fellow trade associations globally. We cannot do this without your help and at the close of the year, it is fitting that we should acknowledge that.
I would also like thank sponsoring firms across our events, the ISLA Board for providing strategic direction and focus to our efforts, and finally to the members of the ISLA team for their tireless efforts during the year, and for facing the challenges that were put before us in an open and pragmatic way.
I would like wish all of you best wishes for the coming festive period, and hope that you can enjoy some rest and relaxation with your friends and family.
Andrew Dyson, CEO
11 December 2020Subscribe to our news