Reflections of the CEO

COVID-19 | ISF & ISLA Webinar Series | European Commission | Capital Markets Union (CMU) | Shareholder Rights Directive | Short Selling

As we pass the middle of June and begin to see what a post-lockdown world could look like for us all, there is no doubt it will take some time before we return to anything that we would recognise as normal. Areas such as retail and hospitality are presented with significant challenges, as we try to reconcile the desire of governments to reopen economies, with the very real threat of a second spike in COVID-19. ISLA’s own conference and broader events footprint is likely to look very different, as we look into the second half of the year and to 2021. Like many, we are already considering virtual alternatives to many of our traditional in-person events, including webinars and live broadcasts. Our live webinar series next month, in partnership with the Global Investor Group, is envisaged to be the first of many as we adapt to new norms (

This is also true of working environments, as most of us have spent almost hundred days away from our office desks. Last week, I joined the Bank of England Securities Lending Committee call, where I was struck by how well our markets had adapted to this new world. Whilst we could simply point to how the regulatory agenda over the past ten years has led to better capitalised and more robust institutions, who as a result, can withstand shocks that we experienced in March, this in my view is only part of the story. There is no doubt that regulators have moved to ensure that banks and other prudentially regulated entities are better capitalised, thereby reducing the potential for further tax payer funded bailouts in the future. However, I would argue that our markets have fared better than some, due to other important fundamentals. In particular, I would highlight how firms have developed robust structures around their businesses, with institutional clients at the centre of their product and service offerings. The sudden withdrawal of large numbers of clients from lending programmes seen during the previous crisis, were with a few exceptions, absent in March. I feel that part of this is down to the way that lending agents and other industry stakeholders (including ISLA), communicate more effectively and comprehensively with their clients. Previously learnt lessons have clearly been understood and applied, this time around leading to a strong ‘business as usual’ ethos across the industry.

As Europe itself begins to move out of lockdown, we are beginning to see how the pandemic has affected both the timing of the regulatory agenda, but also how some of the emphasis on particular policy initiatives is evolving to reflect the post-COVID world. As we look at the European Commission’s (EC) revised 2020 Work Programme that was recently published, we can see how the EC has prioritised certain measures with COVID-19 firmly in mind. For example, it used the flexibility of the budgetary and state aid rules more than ever before, and proposed the creation of SURE, a new EU instrument to mitigate unemployment risks and support workers. In relation to financial services, whilst the fundamental timelines and priorities have not altered materially, we are seeing various initiatives such as Basel IV and elements of the tax agenda moving out. To better understand and follow these changes, ISLA will be publishing two new pages to its website early next week. The first will be an expected EU developments timeline, looking at the key legislative and policy initiatives and priorities for the EC over the coming two to three years. The second will focus on the changes to those priorities in light of the rolling impacts of COVID-19. Please look out for further communications on these.

On 10 June, the EC’s High-Level Forum (HLF) on the future of the Capital Markets Union, published its final report. The HLF, an expert group composed of highly experienced industry executives and top international experts and scholars, was formed in order to feed into the work on the future of CMU policies. The nature and mandate of this group has allowed them to look across various disciplines and existing initiatives and make a series of recommendations with the primary objective of building an economy that serves its citizens fairly. The report is at times very candid in the challenges facing the EU. It describes how ‘Europe has for decades struggled to make its capital markets work as one, and to a large degree still has 27 capital markets, some fairly large, and quite a number rather small. The largest market, the UK, has left the EU, making the financing of the EU economy dependent on a jurisdiction where rules may well start diverging in the medium term. With the UK having left a question for politicians is how much of this market one wants onshore, and how much offshore.’ I also noted a fascinating comment about CSDR embedded deep within the report, where ‘the HLF also discussed the possibility of further delaying the implementation of the mandatory buy-in requirement under CSDR and making it optional. As the HLF was not able to reach a consensus on this point, however, no recommendation is put forward. Going forward, it would be necessary to carefully assess how the buy-in requirement affects markets in a stressful environment.’ Our views on the potential impacts of the mandatory buy-in regime on market liquidity, especially around smaller and potentially less liquid issues is well known. This reference to the group also suggests very clearly that many voices around the table during discussions on this point, would have shared many of our concerns. Whilst regulations that may impact on the settlement process around the delivery and receipt of securities may be seen by many as a market level infrastructure, rules like this clearly have the potential to feed through into the real economy. The HLF sets out some 17 policy recommendations around key areas of interest for our markets including Shareholders Rights Directive, Short Selling, CSDR and Market Making. This report therefore will influence much of the revised agenda across Europe as it moves out of lockdown.

Andrew Dyson, CEO

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