Reflections of the CEO

Earlier this week, the Japanese Government Pension Investment Fund (GPIF) announced its intention to withdraw from securities lending. Needless to say, this has attracted a flurry of reactions in the press and across social media. Whilst it is not the role of ISLA or this piece to comment on that decision, I was struck by how many of the themes that were cited as reasons for moving away from lending, were in fact very familiar to those of us who have been involved in our markets for a number of years. The difference this time was that they had been enveloped in sustainable finance or ESG wrappers. This raises a number of important questions for all of us, as we think more broadly about the developing ESG agenda as well as other important initiatives such as the Shareholders Rights Directive (SRD) here in Europe.

The link between short selling and securities lending has come to the fore again this week, with the relationship between short sellers and long-term investors coming under scrutiny. We have even seen comments from some quarters suggesting that short selling should be banned. By looking at short selling through an ESG lens though, could to a point, be misleading. Short selling is now seen as part of the established capital markets ecosystem, with numerous academic studies outlining the positive role it can play in areas such as efficient price discovery for institutional investors. In its simplest form, short selling is a platform for an investor to express sentiment either in a stock or an index, and as such may be no different to an index manager going over or underweight the index that they are tracking. Furthermore, we now see robust regulation in the form of short selling rules that ensure opportunities to use short selling in an overly aggressive way by using techniques such as naked short selling, are effectively curtailed or banned.

Another much discussed topic this week has been the role of securities lending and voting. This issue is coming into sharper focus as we look at the governance principles laid out within the ESG framework, as well as thinking about the implications of the implementation of the SRD is 2020. Again, this is not a new issue and has been part of the fabric of our industry for many years. I would highlight the language within the Bank of England sponsored UK Money Markets Code that specifically highlights that securities should not be borrowed for the sole purpose of exercising voting rights.

So as we look at a landscape that is familiar yet perhaps with increasingly different drivers, I think we have to ask ourselves what we need to do and advocate so as to ensure institutional investors continue to both lend securities, but also discharge their responsibilities in the context of ESG. As we look at ESG in particular, it is important that investors develop policies around their own preferences in areas such as voting, governance and even short selling. To do this in isolation will over time mean we will see a proliferation of bespoke frameworks, that will present challenges for agent lenders and borrowers alike. I believe it is therefore incumbent upon industry associations to lead the way on developing principles that support securities lending in the context of ESG, that the industry as a whole can embrace.

Not surprisingly, these themes and considerations formed part of our recently published manifesto; Securities Lending to Support More Autonomous EU Capital Markets: Priorities for the Next 5 Years. 

They will also feature as part the discussions and debates during ISLA’s 29^th Annual Securities Finance and Collateral Management Conference, as planning for our flagship event has now begun in earnest.  Look out for regular communications regarding other themes and topics that we will be looking to cover, as we move into another interesting period of regulatory oversight and implementation, amongst other things.

Andrew Dyson, CEO