Reflections of the CEO


2018 has been a year of considerable contrasts, where we have seen the constant overhang of regulation being complimented by a more forward-looking agenda. It reflects the growing acceptance of securities lending as an important part of the investment management process as well as a key component of the CMU and the development of a more broadly-based financial ecosystem in Europe.

As we have spent time this year in key European centres including Frankfurt, Paris, Madrid, Zurich and Amsterdam, I have been struck by the high level of engagement across these markets from key industry stakeholders. Set against this backdrop and the work we do within the context of our ISLA Securities Lending Market Report, we have seen evidence that institutional investors would appear to either returning to securities lending or coming to this market for the first time. This is likely, in part, to reflect the work that we and others have done to move the industry on in the post crises era. Another factor that is driving this renewed interest in our markets is the very real drift towards passive or index investment products, particularly across the retail sector. Here the role of securities lending can either enhance performance or reduce fee points for investors. The arrival of zero fee index tracker funds earlier in the year has considerably changed the debate in this area.

The other constant factor that we have seen throughout the year is the important role that securities lending plays in the government bond sector. With circa 50% of all securities on-loan being government bonds, the role of our market in mobilising HQLA as well as providing a key recycling conduit for securities purchased by Central Banks under asset buy-back programmes, is increasingly clear. As QE begins to unwind in 2019, the role of securities lending in maintaining market liquidity and opening up new sources of institutional supply will be a focus over the next 12 to 18 months.

Another theme that has emerged across all of our various regional roundtable events and bi-lateral meetings during 2018 is the ESG debate. With this likely to be a key focus for the next European Commission later in 2019, it will be important for ISLA to work with the relevant parties to create the right governance and operating frameworks that will allow securities lending to operate effectively within ESG parameters. This will form one of our most important work streams next year.

As we look further into 2019, much of the regulatory work especially around SFTR in 2018 will come to fruition over the next 12 to 18 months. On 13 December, the European Commission started the adoption process for the RTS under SFTR and we now expect the first reports to be due in Q2 2020. 2019 will be a year to build upon the work that we have done so far and collaborate with our membership and broader industry stakeholders to ensure a smooth implementation process as possible.

When thinking about regulation, we should not forget the imminent arrival of CSDR, also in 2020. With CSDR will come settlement failure fines and mandatory buy-ins. Although we should not underestimate the change this will bring, as we discovered during out CSDR focussed Post Trade conference in October there is much we can do as industry participants to alleviate some of the extremes of CSDR by simply looking at current industry processes.

The theme of self-help is also evident around the launch of our new GMSLA pledge collateral master agreement in December. Working with key industry stakeholders, ISLA has delivered an alternative to the traditional title transfer trading model that gives markets participants the opportunity to manage scarce capital and risk assets in a different way.

In closing for the year, we cannot ignore the elephant in the room that is ‘Brexit’. We have seen a year of considerable political upheaval which is set to continue into the new year. It is probably not within our mandate to comment further on the merits of the various Brexit options, however it is clear that a future state that isolates trading and collateral pools in different jurisdictions looks prima facie less efficient and more expensive. We also see any loss of direct access to market liquidity that has for many years resided in the London market as potentially problematic. How the market and the trading landscape adapts to a post-Brexit world will feature prominently at our annual European conference in Madrid in June 2019.

As we look to spend time with friends and family over the coming festive period, I would like to thank member firms for their continued support in 2018.

Andrew Dyson CEO

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