Reflections of the CEO

CDM | ISLA ALFI Briefing | UCITS | SFTR | Basel III

Over the past two weeks, we have had a wide variety of interactions with our members, fellow associations, regulators and industry stakeholders. From bilateral meetings to our first joint-venture briefing event with ALFI in Luxembourg; all have highlighted the breadth and depth of our growing relationships.

As part of our regular dialogue to better understand innovation and new ideas across the industry, we met with two-member firms who are very much at the leading edge of fresh thinking, in and around our markets.  We have seen time and time again unique datasets and emerging technologies that have the power to potentially revolutionise financial markets, including ours.  It is therefore incumbent upon ISLA to provide that neutral platform for new and innovative ideas. We have always championed the role of innovation through our events, and once again our main conference in Madrid in June will consider technology from different perspectives.  As we think more broadly about digitalisation and the development of the so-called Common Domain Model (CDM), ISLA has begun a process to better understand how these concepts can truly apply to our business and the potential benefits they could bring. You will hear more from us on this strategically important topic over the coming weeks and months.

This week saw our first ever joint venture with ALFI. I was delighted to see over 160 delegates join us for an afternoon of thought-provoking debate and discussion, around some of the key issues facing the funds industry in Luxembourg. The opening sessions looked at a range of topics, including the impact of imminent changes to clearing and margining obligations for OTC derivatives as well as the practical implications of these changes on the management of collateral. As markets consider how best to respond to the inevitable increase in the demand for collateral, it was clear from the panel of industry experts that the collateral model is changing. It has to be both seamless to the market and provide efficiencies through cross-product consolidation. It was also recognised that accessing the right collateral mix is key, and that securities lending facilitates safe and efficient collateral mobilisation around the financial system. The discussion then moved to depository banks and the critical role that they play in overseeing and protecting the interests of the investor. Here, the move to adopt more broadly the use of LEI’s and ISO 20022 messaging protocols will clearly push the market towards more cost-effective reporting solutions. Interestingly, any work to closely align the market around common standards is really no different to the broad aims and aspirations of CDM models, that effectively strive to create a common language around everything that we do.

During the second half of the briefing, ISLA took the audience on something of a canter through key regulatory changes. Not surprisingly, SFTR dominated much of that discussion. Notwithstanding the very real challenges that we have to work through ahead of full implementation in 2020, I did remind the audience however that now is the time to look past the difficulties and instead focus on the opportunities that a high quality and timely dataset could potentially bring to the industry. If the industry chooses to deploy the work associated with SFTR more broadly, there are obvious impacts around client reporting. Don’t forget that at a counterparty level, SFTR relies and demands the use of LEIs to avoid some of the very real problems that were associated with the Lehman’s default. To that end, it will create a clear and more concise picture of our world. Against this backdrop, the securities lending panel looked at some of the key business drivers that the industry is grappling with today. The drift towards passive asset management structures and the flow of retail investments into index or tracker funds is focussing more attention on the alpha generated by lending. I expect this trend to continue and if anything, accelerate over the coming months as the European authorities advocate strongly more long-term funded pension schemes. The rising ESG agenda and its implications on the investment preferences of millennials will also undoubtedly occupy the next Commission.

Opportunities around lending are also changing. The significant rise in the lending of government bonds or High-Quality Liquid Assets (HQLA), means that almost half of global securities on-loan today are HQLA assets. Whilst we understand therefore that UCITS can see restrictions around their ability to participate in term HQLA business, the growth in this area of the market is a key driver for change.  Finally looking beyond 2019, the themes of flexibility and innovation discussed in earlier sessions came through.  Lenders have access to an expanding ‘tool box’ of ideas and products, including alternative routes to market such as pledge collateral structures and central clearing.  Whilst some of the earlier discussions revealed that there is still some way to go for the buyside community to fully embrace central clearing, it does represent an interesting alternative to existing bi-lateral business. Both pledge structures and central clearing present different risk weighted asset profiles for borrowers, and as such can facilitate a greater flow of business opportunity for lenders. In looking back, it was clear to me that there is much innovation and product development within the agent community and whilst some of this is being driven by regulatory imperatives such as SFTR and Basel III, they are creating real revenue opportunities for their clients.

Andrew Dyson, CEO

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