Reflections of the CEO

Executive Operations Group | SFTR | CSDR | Middle East

Many of you who read this regular feature, will have heard from me that securities lending provides a unique perspective or window into the broader capital markets arena. Recent weeks have once again highlighted several key touch points, ranging from how the Central Bank of Ireland thinks about securities lending and the role that ISLA can play within the broader collateral harmonisation debate that is being led by the ECB, through to how integral the activity is to the development of new debt and equity markets.

On the 15th May, ISLA hosted its second morning briefing event in Dublin. As part of a varied and diverse programme, we were delighted to welcome Colm Kincaid, Director of Securities and Markets Supervision at the Central Bank of Ireland (CBI). During his opening address, I was struck by how the focus of the CBI is evolving to reflect the changing financial services landscape. In particular, their new supervisory framework for conduct in wholesale securities markets, the supervision of conduct within funds, and the increasingly important role of data in discharging those supervisory objectives. The importance of conduct and behaviour is a theme that we have seen before, and to an extent echoes the Bank of England’s UK Money Markets Code.

When we think about the current regulatory cycle, we first saw the development of a new regulatory regime in the work undertaken by the Financial Stability Board (FSB). This in turn led to a broad array of recommendations, including those of the FSB Workstream 5 on Securities Financing Transactions (SFTs). More specifically in Europe, the European Commission has moved ahead to address transparency concerns within our markets, and the resultant SFTR statutory reporting regime will deliver previously unseen levels of data and transparency to regulators. Here, Colm mentioned that the CBI is mindful of these new and increasingly complex regulatory data sets, and is investing in its own data handling and analytical capabilities. As we see the end of the immediate post crisis regulatory transparency and reporting agenda, the spotlight almost inevitably turns towards conduct and market behaviour. In this context, we expect the Bank of England Money Markets Code to be adopted as an FCA-recognised industry code in the near future, thereby aligning it with the UK Senior Managers Regime and underlining the importance of the role of conduct to the broader regulatory landscape.

The morning in Dublin also allowed the group to look at how the imminent arrival of new margin rules for uncleared derivatives will alter the collateral landscape. As something of a lightning rod for the collateral industry as a whole, securities lending market participants considered how these new rules will affect both market participants and the demand profile for collateral. Whilst there is much debate about how in particular buy side firms will react to these new rules that have previously fallen mainly upon banks, there is no doubt that the role and importance of securities lending is changing. As firms look to both source eligible collateral and mobilise assets more broadly, the securities lending framework that is supported by our tried and tested master agreements will provide an effective execution platform to help fulfil these new obligations. Here it is perhaps interesting to consider that the long term impact of these new rules will most easily be seen through the lens of the securities lending markets.

Earlier this week, I had the opportunity to join our regular Executive Operations Group who formulates much of our policy and best practice work in the post trade space. I have felt for a long time now that in a physically settled market such as securities lending, the importance of strong and disciplined post trade frameworks is in many ways as important if not more, than front office trading and product innovation. In that regard, this group plays a crucial role in both setting and delivering the broad aims and objectives of the Association. SFTR and in particular CSDR are forcing many markets including ours to look inwardly, and critically assess whether much of what we do today is still fit for purpose in a world where there will soon be settlement failure fines and mandatory buy-ins. Those of you who are close to our post trade work will immediately recognise its importance, and how by setting best practice standards for data, life cycle events and corporate actions, ISLA can provide consistent and robust guidelines that the industry can work within. If we get this right, this will reduce fails rates and enhance settlement flows thereby minimising the impacts of some of the most onerous elements of CSDR.

As part of this scrutiny, we are also starting to look more closely as the handling of corporate actions in the context of securities lending, notably SFTR, where ISLA is developing a pan industry consensus of booking processes to overcome the as yet unfathomed regulatory reporting obstacles. Many of you will be aware that the ECB-led Collateral Management Harmonisation Task Force has itself a separate workstream looking at corporate actions. Through a dedicated working group of our own, ISLA hopes to align much of its analysis to theirs, and produce a series of outputs as guidance to the industry.

Finally, I wanted to highlight the inaugural meeting of a new Middle East focused working group that has been formed in response to specific requests from member firms. This group will consider ways in which ISLA can help facilitate and develop domestic or regional securities lending markets in the region. We know that a vibrant and fully functioning securities lending market aids both price discovery and secondary market liquidity. Also, for certain countries it is a critical part of the admittance criteria for global indices such as the MSCI. Whilst it is early days, the first meeting highlighted the potential need for better and more effective education in the region, and using experiences gained here in Europe to support the new and developing markets by exporting our Best Practice principles and Legal Frameworks.

Andrew Dyson, CEO

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