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Securities Lending to Support More Autonomous EU Capital Markets: Priorities for the Next 5 Years

The International Securities Lending Association

(ISLA) represents the common interests of the

securities lending industry in Europe and beyond .
1

With 45% of our membership based in the EU27, and our other members committed to the development of a vibrant
EU (European Union) capital markets, we are delighted to share our views and recommendations on the design of an EU
financial services framework that enables securities lending to play an integral part in supporting the development of
stronger, more autonomous capital markets in Europe.
We look forward to continuing our constructive dialogue with EU policy makers in the coming years.

Why Securities Lending Matters to Europe

Securities lending is crucial to support capital markets financing in the EU, notably in the context of it’s Capital Markets Union (CMU)
project.

It makes markets more liquid and more efficient.
It gives banks access to the securities they need to meet their market making commitments and obligations towards clients and EU
governments.
It reduces operational risk in the system. It is an essential tool used by EU financial institutions to meet
It helps to reduce so-called ‘failed trades’ as it makes securities their EU risk management regulatory requirements, thus
available where they are needed, leading to a reduction in reducing systemic risk.
settlement failures. EU legislation rightly requires banks and other market participants
to hedge risk by ‘collateralising’ their exposures to counterparties.
It provides additional incremental revenue for investors. The mandatory bilateral margin requirements under EMIR for OTC
Beneficial owners of securities, including retail investors and Derivatives is the best example of this. In prudential legislation,
pensioners, are the ultimate beneficiaries of the income generated banks are incentivised to hold high quality securities, such as
from securities lending. This is because investors government bonds, to ensure their own health. The best example
that lend securities receive a fee in return, which either flows of this is the Liquidity Coverage Ratio (LCR) requirement for banks
directly to the end-investor, or reduces management costs for under the Capital Requirements Regulation (CRR) framework.
the end-investor.
Securities lending enables market participants to access the
It supports the increase of retail participation in capital markets. securities they need to meet these obligations.
The emergence of very low-cost retail investment products (such
as zero fee tracker funds) is in part due to management costs being
supported by revenue from securities lending. By making investing
in the securities more appealing, securities lending stimulates
retail investment flows into the capital markets.

What Is Securities Lending?

Securities lending is the temporary loan of a security (usually stocks or bonds) by an institutional investor (usually a fund
or insurance company) to a borrower (typically a bank). To ensure the investors capital is not put at risk, the borrower is
required to provide collateral. They do this is in the form of either other securities or cash. The value of the collateral is
almost always greater than that of the securities they lend.

1 For further information about ISLA, see: https://www.isla.co.uk