Reflections of the CEO

COVID-19 | ISLA Securities Lending Market Report | UMR | SFTR | CSDR

The phrase ‘living in unprecedented times’ is often used but rarely warranted; I think the events which are unfolding across Europe and beyond however, are truly worthy of the description. Many of the standard reference points that we live our lives by are being challenged, and things that we regard as norms suddenly look out of step with the realities that we face. I shall not comment on how the UK or other global governments are responding to the challenges of what was described as a pandemic by the WHO earlier this week, but we do have to think about the implications for our markets.

In the post financial crisis era, regulators and policy makers progressively implemented regulation that has led to banks being better capitalised and better at withstanding shocks, as we have seen this week. Whilst we would all support the idea of ensuring that the banking sector is robust, there is some evidence that parts of these regulatory frameworks actually disincentivise banks to assume trading risk or provide market liquidity. Recent events in the US repo markets where liquidity came out of the banking system and therefore led to central bank intervention, raises important questions about how these rules should work. Similarly, as banks and market makers hold less inventory for regulatory capital purposes, we have seen instances where markets can fall without the natural buffer of banks proprietary desks to intervene and dampen down some of these excesses. As I am writing this piece, we have just seen the FTSE 100 post its single largest fall since 1987. Now, it would be crass to necessarily link this to the regulatory straight jackets that many argue banks are wearing today, but it will be important to understand why markets behaved in the way they did once this crisis is behind us.

In our latest ISLA Securities Lending Market Report, we noted that some 45% of non-cash collateral held in tri-party accounts across Europe, was classified as equities. As these assets have depreciated in value over the past two weeks, borrowers have become obliged to fund additional collateral. This will be driving considerable activity in both the securities lending and repo markets, as borrowers look to source acceptable collateral. Similarly, investment managers who are impacted by waves five and six of the Uncleared Margin Rules (UMR) regime, will be dealing with the same issue if they have posted or received equities as part of their margining process.

Notwithstanding the very real challenges associated with the current market, I am also mindful that we are very close to the go live date for tier one firms with respect to SFTR. With less than four weeks before the first reports are due to be submitted, we are seeing something of a perfect storm developing as SFTR teams are being redeployed to support BAU contingencies. In addition, any unexpected rise in coronavirus cases that could affect the workforce will further stretch resources. Whilst we remain focussed on working with our member firms and other stakeholders to deliver compliance with the reporting obligations next month, we are clearly seeing some signs of stress within the system here.

Although our focus is elsewhere for now, we must not forget that CSDR implementation is also on the horizon. As I have outlined here before, CSDR unlike SFTR has the real potential to change behaviour in our markets as firms think about the implications of fines for settlement fails and the mandatory buy-in regime. When thinking about CSDR, there has been much debate around the actual financial impact of this regime and what fines would look like if applied to today’s markets. It was therefore interesting to see the recent analysis published by Pirum that suggested that its clients could be facing fails fines of €80-€110 million per year, with estimated fails management costs of €120 million and CSDR fines management costs of up to €85 million (

As we begin to understand the potential magnitude and scope of these fines, it is vitally important that we take a very hard look at our current working practices to better assess where we can modify procedures to alleviate the extremes of this regime. The work published by Pirum underlines how important this work is.

In closing, I would like to offer our best wishes to our members, their families and loved ones during what are truly exceptional times for us all.

Andrew Dyson, CEO

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