Reflections of the CEO

SFTs | GMSLA| Documentation

On 28 February, I noted with great interest the publication by the International Swaps and Derivatives Association (ISDA) of the 2022 ISDA Securities Financing Transactions (SFT) Definitions and SFT Schedule Provisions. These new provisions will allow for derivative transactions and SFTs to be documented under a single master agreement. Whilst ISLA was not part of this initiative, which began with the publication of an ISDA white paper on the topic in October 2020, we do of course welcome any new or novel approaches that may drive efficiency across our respective markets.

The publication of this new cross-product framework affords us the opportunity to think about what it is that fundamentally drives our own Global Master Securities Lending Agreement (GMSLA), and the key attributes that underpin its success. It is equally important to consider the direction that the new ISDA provisions would take us in, and what that could mean for our membership and other key industry stakeholders.

Securities finance essentially remains a simple exchange, where one side lends securities against receipt of collateral in the form of either other securities or cash. Neither the new collateral arrangements underpinning the Pledge GMSLA, which are designed to reduce the impact of regulatory capital charges on borrowers, nor the use by institutional investors of securities lending programmes to raise and manage liquidity fundamentally alter the essence of the transactions.

We have actively pursued a strategy of developing annexes and protocols that both support the adoption of the GMSLA more broadly, as well as reflect the needs of our members. This approach has led to the development of agency provisions that allow agent lenders to lend on behalf of multiple underlying clients but also the development of new documentation, such as the Pledge GMSLA.

More recently you will have seen ISLA conclude an agreement with our friends at the Pan Asian Securities Lending Association (PASLA) to pool our legal resources. This will allow ISLA to begin the process of incorporating the relevant jurisdiction annexes into our core legal business. Over time, this process will allow ISLA to have these annexes addressed in our core opinions offering, which would provide greater consistency, certainty and clarity for market participants.

That desire for consistency, clarity and certainty is at the heart of much of our work on opinions, where working with local counsel and other partners, most notably the International Capital Markets Association (ICMA), we routinely gather enforceability opinions for securities financing documents in over 65 jurisdictions globally. Most importantly, that work allows our members to view the obligations under the applicable securities financing documentation on a net basis for the purposes of their regulatory capital treatment. A failure across the market to secure this regulatory treatment could adversely affect much of the securities lending business that we see today, and severely impact secondary market liquidity as well as undermine the ability of short side market participants to effectively cover and hedge their positions.

Drawing on this experience and looking back at the recent work published by ISDA, we note that they do not address the agency structure through which a high proportion of the securities lending transactions in the market are currently effected, and also do not apply to the pledge structure which the Pledge GMSLA seeks to document. Similarly, although the new provisions potentially offer netting from a credit perspective, and whilst it will naturally take a little time for the opinions to be in place to support this credit benefit, the regulatory capital treatment of SFTs and derivatives are distinct in a number of ways: the products are valued differently from an accounting perspective, and importantly have different treatments from a liquidity and regulatory capital perspective and entirely separate regulatory requirements (for example, uncleared derivatives are subject to a complex margin regime). Bringing these two quite different and distinct worlds together in a single document may help from a broad credit perspective but it does raise complexities, particularly with regard to regulatory capital, which it will be essential for market participants to analyse and validate in their own context, especially at a time when a range of other demands are being placed on legal departments in a rapidly evolving market.

From our perspective and as I said in my opening remarks, we consider this initiative to be an opportunity to explore how to further increase the efficiency of the market and welcome further dialogue on this initiative especially as our respective work streams cross over time.

Andrew Dyson

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