COVID-19 | SFTR | CSDR | Sustainable Finance | EC Work Programme | Tax
Earlier this week, I was delighted to be invited by Roy Zimmerhansl at Pierpoint Financial Consulting to participate in their ‘Perspective$’ podcast series. Whilst I would not want to say too much about that session which will be made available in early June, some of the topics we discussed did get me thinking more broadly about the future, and the role that an association should play in the development of our markets.
As we begin to think about what the world may look like as we emerge from lockdown, there are a number of themes that will undoubtedly dictate the direction of travel for securities lending over the coming weeks and months. Some of these will be familiar to us all and will inevitably revolve around the regulatory agenda, with SFTR and CSDR upper most in our thinking and planning. Whilst others, such as the sustainable agenda, will become ever more prominent and increasingly more important in defining the financial services sector. I believe that the role of ISLA is to both deliver market compliance in a regulatory sense, but also think past the day to day and look over the horizon towards the future.
I have said many times in this blog that SFTR has presented considerable challenges to the market, and that we have discussed openly and candidly with our members as well as the regulatory community about the need for such detailed reporting measures. This debate has been further fuelled by the absence of similar regulatory regimes elsewhere, especially in North America where the current administration sees this type of reporting in a very different light. This apparent lack of global coordination raises important questions here in Europe, where reporting firms may well feel that carrying the additional costs associated with the myriad of reporting regimes to undertake business within the EU, puts them at some sort of commercial disadvantage. In November 2015, the Financial Stability Board (FSB) issued guidance on the standards and processes to allow them to periodically collect aggregated data on SFTs from national and regional authorities. In that same guidance, the FSB went on to say that it would start working on the detailed operational arrangements, with a view to initiate the official global data collection and aggregation by the end of 2018. That milestone seems a long time ago now, and quite rightly our attention and focus is elsewhere at the moment. However, if the regulatory community wants to maximise the transparency provided by the SFTR regime, the issue of better and more coordinated actions at a global level has to be revisited. In November, the G20 is scheduled to gather in Saudi Arabia, a market that itself is looking to develop a fully-functioning securities lending market. To my mind, this presents something of a perfect opportunity for a developing capital market to chair a debate on how their G20 peers, with more developed financing and trading ecosystems, can work more closely to both understand and actively manage macro financial stability issues.
Like SFTR, CSDR has been a constant theme for much of 2019 and 2020. Here again however, we are seeing some subtle changes to what CSDR actually means to our member firms. Previously we have documented our reservations regarding certain aspects of CSDR, including the much discussed mandatory buy-in provisions. Whilst you will hear more from ISLA on this specific point in due course, the broader issue that is at the forefront of our minds, is the critical importance of understanding how settlement fail fines and buy-ins will move up and down the securities lending value chain. It is already recognised that elements of our market facing Global Master Securities Lending Agreements (GMSLAs) will need to be amended to accommodate the legal provisions embedded within SFTR. Similarly, it will be crucial for lending agents and other intermediaries to ensure that their own client contracts and custody arrangements also reflect these changes. Failure to do this could expose clients to undue financial and reputational risks.
If we look further out, and in particular how Europe itself might look post-COVID-19, we can already see the key levers that the European Commission may use to define the collective direction of travel for the EU Member States over the coming weeks and months. Much of the EU’s focus will be built around the sustainable finance agenda, with the Green Deal being seen by many as even more critical, as it is expected to remain at the centre of the policy agenda. The pandemic is being used to underline the need for a more economically and socially resilient system, with policy makers underlining that the climate crisis will only exacerbate the risk of future pandemics. For instance, sustainability or the green agenda is at the core of many bail out deals that we seeing across Europe; Air France and the clear green conditions set out by the French government (halving co2 emissions per passenger-kilometre by 2030 compared to 2005 levels, and drastically reducing domestic flights) being a good case in point.
From our perspective, the work we are doing through the ISLA Council for Sustainable Finance (ICSF) has already set clear aspirational standards for the market to coalesce around, to effectively align securities lending with the sustainable finance agenda. As the market increasingly demands Economic Social and Governance standards around key areas such as voting, taxation, short selling and shareholder engagement, ICSF is ideally placed to lead the development of those standards at an operational level. It was also encouraging to see our friends at the Pan-Asia Securities Lending Association (PASLA) take a bold step into the regional ESG space with the publication of their survey on the relationship between securities lending and ESG principles across the Asian markets. I hope that the survey that was undertaken in conjunction with EY, will lead to further debate and discussion across the region as part of the wider global agenda on this issue.
Just as I was concluding my thoughts for this latest blog, the EC released its revised Work Programme for 2020, taking into account the impact of the COVID-19 crisis on its up and coming initiatives. As alluded to earlier, the Commission will continue to focus on its flagship initiatives, including sustainable finance and the Capital Markets Union. Although with some changes to immediate priorities and sequencing, we will see some bunching of the legislative agenda into the latter part of the year. I also noted the attention given to the developing digital agenda in the Commission’s Work Programme, which is seen as a key issue area as the COVID-19 crisis has accelerated digital transition. Following the publication of our Agenda for Change white paper back in October of last year, where we contemplated how our markets should embrace the digital wave, we have begun delving into some of the practical implications of those ideas. As part of that process, we have established a new Digital Working Group that will help lead our thinking in that area. Should any member firms want to be a part of this important initiative, further details may be found here.
Finally, the Commission confirmed a very real focus on taxation. Whilst traditionally this has been a subject that has been dealt with at a Member State level, we can see from the references made by the Commission that taxation is attracting more focus at the EU level. From our perspective, securities lending has always been a business that is very sensitive to tax and taxation issues, and we have a long history of working with member firms and the wider community to identify areas where market-wide solutions and best practice may be appropriate. This week saw the publication of two key tax related outputs from the Association. Firstly, the revised 2020 US Tax Addendum to the GMSLA 2010, along with supporting guidance notes. The new addendum provides a broader approach, covering Qualified Derivative Dealer and Qualified Securities Lender statuses concurrently. The revised version also addresses a number of issues, including FATCA non-compliance tax risk on collateral securities that are not substituted ahead of income dates. This was closely followed by a position paper on the EU Directive on Administrative Cooperation (DAC6).
As always, I wish you and your families well during these uncertain times.
Andrew Dyson, CEO