Reflections of ISLA’s 28th Annual Securities Finance & Collateral Management Conference

Transition…Innovation…Future State

18 – 20th June 2019, Madrid

Conference Co-chairs: Gilly Meth, Managing Director, Morgan Stanley & James Templeman, Managing Director, Blackrock


Tuesday 18th June
The format of this year’s opening afternoon was once again focused around key presentations and updates from ISLA, key member firm SMEs, partners and other industry stakeholders.


Presentation: European Political Outlook
We were delighted to welcome Donald Ricketts, Managing Director at FleishmanHillard, who provided a detailed review of the European Political landscape. Donald began by setting the scene, considering firstly the geo-political situation that the region faces when one considers global power struggles, as well as the longstanding reliance on the rest of the world for exports and energy amongst other things. Combined with the internal challenges around rising populism and tensions between surplus and deficit nations, Donald talked about the relevance of the EU against the backdrop of challenges. What next for the EU 26? Recent election results will mean a more fractured parliament, with the UK’s departure having no material impact on the shape of the parliamentary landscape. France will be a key driving force for decisions, whilst Italy’s sovereign issues will further compound their own national problems. Finally, Spain will become far more influential going forward.

Presentation: ISLA’s Legal & Tax Initiatives 2018/2019
Habib Motani, Partner at Clifford Chance focused his legal update to delegates on the delivery of the GMSLA Pledge project in 2018.  His presentation included detailed explanations of both the traditional title transfer as well as the new pledge collateral models, together with information pertaining to the supporting legal documentation (including opinions) that are available to ISLA members.  He concluded with further considerations relating to the GMSLA Pledge; the development of a new master agreement to accommodate pooled principals, and the potential collection of opinions to cover the enforceabliity of collateral interest across different client types and jurisdictions.

As part of a member’s update on the work of the ISLA Tax working group, Steve Raddon, Head of the group looked at some of the key topics that they has been focused on over the past 12 months. In particular, some 12 months on from the implementation of the new dividend rules in Germany, Steve remarked on how some of the lending supply that had left the market immediately after the implementation of these new rules, had in fact returned this year as lenders became more comfortable with them. Steve also highlighted the work that the Tax group has been doing around particular jurisdictions, including the overarching DAC6, where the main aims of the Directive are to provide tax authorities with an early warning mechanism on new risks of tax avoidance, thereby enabling them to carry our audits more effectively. Dalia Hamdy from Scotiabank then joined Steve to provide an update on recent fiscal changes within the Canadian market, and their impact upon securities lending participants.

Presentation: ISLA SFTR & CSDR Working Group Updates
For the first time at the conference, representatives of both ISLA and ICMA decided to come together and provide a joint presentation on SFTR and CSDR.  In the context of SFTR, Adrian Dale, Director of Regulation and Market Practice at ISLA, and Alexander Westphal, Director, Market Practice and Regulatory Policy at ICMA talked about Article 4, their respective working group and task force initiatives, planned deliverables, as well as the key challenges that they see facing both markets as they look towards compliance.  In a similar vein, James Montgomerie. Chair of the ISLA CSDR working group and Andy Hill, Senior Director, Market Practice and Regulatory Policy at ICMA talked about the scope, aims and timelines for CSDR, as well as the ongoing work of both associations to identify root causes and remedies of ongoing settlement inefficiencies.

Panel Session: Regulatory Convergence in 2020
Our final panel of day one went on to consider the specific implications of regulations such as SFTR, CSDR and uncleared margin rules for derivatives transactions, as well as their combined coming together in 2020.  In terms of SFTR, they focused on some of the re-use restrictions, and links to similar rules as defined within MiFID, as well as broader transparency that SFTR will bring and its implications for agent lenders. The panel spoke of depository segregation, where under imminent/new rules, any custody activity delegated to a third party will mean the depository bank may no longer rely on the records from the party providing the third-party service. New margins rules for uncleared derivatives – wave 4 and 5 of the implementation of these new UMRs will have immediate impact on buyside firms. What will be the impact on business models? Will clients have to de-invest the fund to create appropriate collateral? What are the implications for our markets of these changes? Do we see a greater demand for access to securities lending asset transformation techniques?


Wednesday 19th June
Day two of this year’s conference featured our first keynote speech, as well as a number of new and familiar panel discussions.


Opening Keynote Address
ISLA was delighted to welcome back Steven Maijoor, Chair of the European Securities and Markets Authority (ESMA).

Steven focused on three main areas; ESMA’s data strategy, relevant international developments related to data issues to which ESMA is actively contributing. current work on reporting under SFTR where ESMA are actively working on turning the data into intelligence for authorities and useful information to the public, and finally some practical examples of the use of data by ESMA and the national authorities for supervisory purposes.

Download the full speech here.

Steven also talked about three additional areas; ESG and the development of broader ESG standards and performance opportunities, the development of a broadly based Capital Markets Union (CMU), which is a priority for next European Commission, and the greater involvement from retail investors within in capital markets.

Panel Session: Unlocking Liquidity Through Securities Lending – Spain, Saudi & Beyond…
The panel began by considering the Spanish mutual fund industry, and how the financial crisis played a significant role in diminishing any desire to allow these domestic funds to lend.  In 2018, the Spanish government re-opened the debate by publishing a new consultation.  Subsequent political changes early this year delayed this progressing through the legislative process into implementation, however recent feedback would suggest that the process is under review once again, and one remains optimistic that a positive outcome is imminent.  International funds sold to Spanish investors are growing at three times the rate of domestic ones, which makes this decision ever more critical if one considers the unlocking of this liquidity.  The discussion then moved onto new markets, where an audience question revealed that Asia, followed by Saudi Arabia, India and South America were seen as the biggest areas to provide both liquidity and revenue opportunity to the lending markets.  Saudi’s inclusion in the MSCI World index is certainly pushing market developments in the region, and ISLA’s Middle East working group can certainly play a significant role in taking this forward.  In the debate around product development and different trading structures and strategies, binding constraints such as RWA are continuing to push firms towards pledge and peer to peer.  They are certainly making it easier to enter the market, particularly when one considers the compliance and legal barriers that one has to overcome.  It was also highlighted that on-boarding still remains a major barrier to entry for small funds.

Panel Session: Navigating a ‘New Europe’
Europe is at something of a crossroads and is being buffeted by many different forces. On the one hand, Europe is having to react to the rising global agenda of populism, yet on the other the practicalities of dealing with the uncertainties of Brexit dominate the news and political agenda. This is leading to a point where the political agenda is driving macroeconomics, rather than the other way around. As this group came together to think about the broader implications for our markets and how we shape our business models over the next three to five years, these common themes dominated much of the discussions.  In isolation, Brexit would offer up many challenges across our markets, however in the case of the UK separating from the EU, what would be the implications of this for the broader CMU agenda across the rest of Europe? Where there has been much reliance on London markets, especially for market liquidity, this could not necessarily be relied upon in the future. The group felt that the pace of development of the CMU would now quicken.  A great deal had already been done to resolve settlement and infrastructure anomalies across Europe, and the UCITS brand has become a truly pan-European/global investment framework that is ideally placed to support the wider investment in the capital markets by retail investors across Europe. However, the panel felt that to see a broader adoption of so-called equity investment risk by retail investors, there would have to be a cultural shift in sentiment which may take generations to fully implement.

The panel also noted that the new European parliament is likely to be more fragmented and centre left in its outlook, and this would heighten challenges around getting future legislation agreed and implemented. This point was noted in the context of the developing ESG agenda, where it was felt this initiative has considerable voter support and momentum.
The crossroads that Europe is at presents something of a conundrum which can be seen very starkly in our markets. Europe, unlike the US does not have the luxury of isolationism and is neither energy nor trading self-sufficient. This is no different in our markets, where circa 60% of all open loans come from a lender who is outside of Europe. Our business models therefore need to be both open and flexible.

Panel Session: The Impacts of ESG on the Institutional Investor Landscape
ESG was a theme that resonated across the three days of the conference. Although a topic that is only now becoming prominent in our world, the broader sustainable finance agenda is now defining future policy and legalisation. This discussion was very timely in light of the recent publication of The European Commission’s Technical Expert Groups reports on Taxonomy and the use of Taxonomy in the context of sustainability (18th June). The panel session considered the implications of how our markets will have to adapt and change their thinking to ensure that securities lending can co-exist along side the principles associated with ESG. They highlighted how ESG factors are already used during most asset allocation processes, and that these principles are now seen as integral to investment management. The panel suggested that any lending activity has to be consistent with the investment ethos of the fund. This will include the type and profile of any collateral received, as well as how potentially lent securities may be used by borrowers. In addition, the panel felt that it was important for lenders to have a clear governance policy that will dictate how they may recall securities to ensure that as responsible investors, they exercise their voting rights, especially around sensitive decisions. The session concluded with a clear recommendation that lenders should develop clear policies around securities lending.


Thursday 20th June
The final day of the conference centred around diversity and inclusion, technological innovation, and making sense of all that was discussed during the overall conference.  A true embodiment of each and every aspect of this year’s theme!


Presentation: Common Domain Model
Ahead of a broader discussion on ‘Realising the Benefits of Digitalisation’, Clive Ansell, Head of Market Infrastructure and Technology from ISDA took delegates through the development of ISDA’s Common Domain Model (CDM). The so-called CDM is the leading edge of development thinking today, and offers significant benefits in terms of standardising how products, including derivatives, are traded and managed throughout their life cycle. Clive highlighted how the deployment of a CDM can reduce legacy costs associated with trade affirmation, collateral management, reconciliations, corporate actions and settlements. In essence, the ISDA CDM is a machine readable and machine executable data model for derivatives products, processes and calculations, that is also able to support digitalised forms of master agreements. Clive also highlighted how a CDM can interact with the regulatory community, with the FCA already part way through a pilot study to embed relevant digitalised reporting language within the ISDA CDM model. The work that ISDA have done in this area has clear and obvious implications for our markets, where similar efficiencies can be achieved over time.

Panel Session: Technology – Realising The Benefits of Digitalisation
This session bought together a number of key industry stakeholders to talk about where the technology debate is taking us and the current drivers for change.
Following the previous presentation from ISDA on their work around the development of a Common Domain Model (CDM), it was interesting to note that when the audience was asked about CDM, over two thirds of the respondents had not heard of the concept. This perhaps suggests that there is still some work to do to socialise this important part of the forward looking technology agenda within our markets. The debate then moved on to how the role of technology today is increasingly more aligned to the needs of the business. The example of how a securities lending CDM could be developed to address, in part, the circa 10% of fails reported to ISLA in our recent settlement efficiencies survey, was discussed. With failed settlements attracting regulatory penalties under CSDR, momentum is building around solutions that reduce these fails. A fully aligned CDM would push fails rates down, and allow the market to crystallise efficiencies around the automation of previously manual process, especially around life cycle events. Equally, it was also suggested that should our markets have access to a fully developed CDM, the cost of compliance and implementation of SFTR could be reduced by circa 50%. Set against this backdrop, the session then touched upon how the digitalisation of master agreements will also bring immediate benefits associated with the standardisation of common terms and conditions, as well as facilitating more efficient one-to-many documentation updates. As we heard more about this specific issue, it was clear that our markets have been something of an island and today we lag behind some of the leading edge thinking about how to take a broader documentation platform forward within a digital framework. Aligned to the work around the digitalisation of our legal frameworks and trading flows, the session also looked at the work being down to tokenise collateral. This will allow ownership of collateral to pass without physical movements within custody accounts, and will have far reaching implications for all aspects of our industry and the broader asset servicing community. The closing message from this discussion was one of better alignment between the technology solution and the business need. Firms will spend money and invest in the future, but it has to be relevant with clear and quantifiable benefits.

Presentation: Creating A More Diverse Industry
Our final presentation of the day was delivered by Jon Terry, Global Financial Services People Leader at PwC.  ISLA is committed to both diversity and inclusion within the Association, as well as the broader industry and financial markets.  Although Jon focused on gender equality during the earlier ISLA/Women in Securities Finance Breakfast event, this presentation expanded on that and a number of other important themes.  He began by explaining why diversity and inclusion matter, and the catalysts that are driving change; governmental focus, regulatory focus, greater disclosure requirements, talent looking for employers with similar values, heightened investor awareness, increased customer awareness and greater media attention.  Diversity has positive implications for customers, returns, team innovation and value, attractiveness as an employer, and reputation and brand.
Jon then discussed the idea of ‘inclusive leadership’ and the real essence of what that should mean.  Here he talked about the right tone and messaging from management around diversity and inclusion, support for policies, and finally the positive impacts that perceived inclusive leadership can have on external stakeholders such as clients, investors and future employees.
Jon’s final topic looked at the five fundamentals of diversity and inclusion; alignment of diversity with one’s business strategy, accountability from senior leaders, setting realistic objectives, measuring progress through data and analytics and finally honesty.

For full details of this year’s agenda, speakers and a gallery of images, click here.


Thank you to Gilly, James, our delegates, speakers and sponsors for their support.  See you in Vienna in 2020!

Sejal Amin, Head of Events, Marketing & Communications

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