Reflections of the CEO

EC CMU Action Plan | EC Digital Strategy | ESMA Work Programme 2021 | ESG

Increasingly as we look at the world around us, we are beginning to remark on how different things are today, compared to pre-COVID. There is no doubt that almost every element of our personal and professional lives has been affected or changed by the pandemic. As we face what resembles a second peak of the infection across the UK as well as many parts of Europe however, we appear better prepared for what might happen next, and I sense that all levels of business are continuing to push forward, rather than being paralysed by the effects of the virus and related restrictions. In an earlier blog, I highlighted the publication of the European Commission’s CMU Action Plan and Digital Finance Strategy in late September. Whilst I will not dwell further on their contents, they both represent strong statements of intent to move the debate around these important initiatives forward.

Aligned to this, I was also delighted to see the recent publication of ESMA’s Work Programme for 2021. In the introductory remarks, ESMA develops the idea of transversal themes, where it will assist with new initiatives resulting from the CMU Action Plan, the Renewed Sustainable Finance Strategy, and the new Digital Finance Strategy and Action Plans that will cut across traditional businesses and regulatory silos. ESMA goes on to say how it considers the development of the Capital Markets Union as one of its strategic priorities to finance the economy, ensure economic growth, create jobs, and to speed up the recovery. It also highlights how the pervasiveness of ESG considerations across all areas of legislation, including building common approaches for incorporating ESG factors in NCAs’ supervisory practices, will be a priority for ESMA’s work on supervisory convergence. To that end, it confirmed that it will produce a roadmap for supervisory convergence in sustainable finance in due course. This tells me that ESG, if we did not realise it already, has moved from being a discrete topic in its own right, to a key driver of regulatory and policy focus that will impact almost everything that we do. Those of us who have spent considerable time and effort developing separate ESG strategies with specific advocacy efforts, might have to rethink those plans and priorities. I experienced how that change of thinking is in fact already with us, when I recently participated in the J.P. Morgan Triparty Sustainable Finance (ESG) and ETF Roundtable. We talked extensively about how ESG is changing the way we think about both lending but most importantly, collateral. Thinking about this through the ESMA transversal lens, the issues here are not ESG related but are collateral issues that need to be addressed against ESG criteria. In many ways, this no different than thinking about counterparty risk against the standards of credit ratings; ESG is now simply another attribute or factor that will underpin our businesses.

I will come back to ESG later in this piece, but before I leave the ESMA Programme, I wanted to highlight two additional points outlined therein that we at ISLA will follow closely as we move into 2021. First, under Market Integrity, ESMA is looking to ensure consistent application of the Short Selling Regulations across the EU 27, by providing guidance to market participants. It is not necessarily clear why this has appeared in the Work Plan, but it should be remembered that during the round of short selling bans seen across Europe at the height of the pandemic, there was some clear inconsistencies in terms of scope and implementation, with at the time, calls for ESMA to do more in this area. The second point I wanted to focus on relates to planned work in and around investment management. One of ESMA’s key themes for 2021 is to achieve greater convergence and consistency of NCAs’ supervisory approaches and practices in relation to the EU legislation on investment management (with a particular focus on improving investor protection and financial stability through ESMA’s work on funds’ liquidity). The Work Plan contemplates that this will include an increasing convergence in the supervision of costs for UCITS and AIFs, including securities lending fees and costs.

As I have already alluded to, the drum beat of the ESG agenda is one that will be with us for the foreseeable future, and its resonance will get louder and more important as we move into 2021. We highlighted in our recent response to the Commission’s consultation on sustainable finance, how important it is that regulators and policy makers alike develop and deliver relevant and appropriate taxonomies that support this fledging and growing industry. Without those standards, it will be hard for the financial services sector to develop effective and cost-efficient products and services. Whilst we wait for it to publish its strategy for sustainable finance (expected before the end of the year), I noted the recent announcement from the Big 4 on a joint initiative to develop a reporting framework for ESG standards. Reporting of ESG metrics has for some time been subject to numerous standards and benchmarks, that have made it hard for investors to truly judge ESG performance. In 2019, it was reported that there were some 1700 different ESG standards that companies could report against. This move towards standardisation is perhaps long overdue, and will allow investors and other market participants to better evaluate companies on a comparative ESG basis. In the context of securities lending, better comparative tools, including ESG ratings, will facilitate amongst other things, better collateral screening and selection.

One of the clear impacts of the pandemic has been the increased focus on digitalisation, led by changing consumer and business demands. High streets have in many places been decimated by the rise of on-line shopping, and some would argue that the pandemic has simply accelerated the direction of travel as we find ourselves now gazing at boarded up shops.
As we look closer to home, we see a desire from members to look differently at our markets and the way we do business. If you are a regular reader of our news or updates, you will know that ISLA has for some time been developing its own digital strategy, including the commissioning of two pilot studies. These are looking at the broad securities lending markets in terms of trading and life cycle events, as well as some specific legal-based work around our suite of master agreements. This initial work will culminate in a virtual event that will showcase the work done within the pilots, and will include demonstrations of how the code can be applied in a number of specific business use cases. I am always mindful that technology projects can exist in the mind’s eye of the developers, and to deliver real benefits in the real world, we have to articulate those benefits to the wider user and business community. This event, which is likely to be at the very start of December, looks to demonstrate the value of this work to our markets. Further details will be announced in due course.

One of the logical destinations of the Common Domain Model is the legal space, where the development of common terms via a digital clause library will lead to dematerialised/electronic contracts and fully digital master agreements in due course. Set against this backdrop, I read the recent white paper, ‘Collaboration and Standardisation Opportunities in Derivatives and SFT Markets’ published by our friends at ISDA, with considerable interest. In this detailed paper, they argue for the potential efficiencies that could be achieved by closer coordination and alignment across adjacent markets. Whilst we would want to consider the implications of this paper in more detail with our members and other industry stakeholders, I feel that this is an important topic, and I look forward to an open and wide ranging debate on this important issue across our industry.

Andrew Dyson, CEO

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