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

Priority 4: Adjust CSDR to Ensure Optimal Settlement Discipline that

Supports Market Liquidity

Improving settlement efficiencies in financial markets is one of the key reasons securities lending developed, and is still an
integral part of the settlement landscape today. Hence ISLA supports the objective of the EU Central Securities Depository
Regulation (CSDR) to improve settlement discipline across the capital markets, including the imposition of fines for failed
trades. There is clear evidence that they change behaviour and improve settlement rates.

We would however urge European policy makers to revisit the mandatory buy-in regime that forms part of the legislation. Our widely
used Global Master Securities Lending Agreements (GMSLA) already provides a series of operational and legal remedies for the party
who has failed to receive either loaned securities (lender) or collateral (borrower).
• Where a lender fails to receive back securities either at the agreed end-date of a term loan or following a specific recall of an open
transaction, they may elect to keep the trade open in their books. In doing this, they also have the option to increase fees (re-rate) on
the outstanding loan to penal levels. This incentivises the borrower who is failing to deliver securities back to the lender to remedy the
position quickly, whilst compensating the lender for non-redelivery of the lent securities.
• The lender may then elect to terminate the loan as if that specific loan was in default.
• The lender may use the proceeds from the liquidation of any collateral to buy-in the original loan position. This allows them to
purchase equivalent securities, with any costs being passed directly to the original non-delivering party.
Priority 3: Address Data Issues in SFTR Implementation to get the • In extreme circumstances where the lender cannot buy-back equivalent securities in the market to replace the original on-loan
Full Potential Systemic Risk Picture position, they may receive a cash equivalent amount equal to the value of the original lent securities.
These remedies have been standard market practice for many years and unlike the CSDR mandatory buy-in structure, allow a degree
ISLA has long supported the push by global and EU policy makers for more transparency in securities financing markets, of flexibility for the party that is being failed in to ensure that it is able to achieve the most appropriate outcome commensurate with
of which securities lending is a crucial element. its needs and objectives. The mandatory buy-in structure could lead to outcomes which place the original lender of the security (i.e. the
institutional investor) at a disadvantage financially. These risks could lead many institutional investors to withdraw their securities from
ISLA is proactively leading the securities lending industry’s efforts To address this significant data gap, we urge the EC to review the lending programmes thereby undermining liquidity provision in markets.
to implement and comply with the EU’s Securities Financing SFTR’s reporting regime and move from dual-sided reporting to Furthermore, this type of liquidity risk is more pronounced in certain of the asset classes (such as corporate bonds) which the CMU
Transparency Regulation (SFTR) reporting requirements. We are single-sided reporting by the borrower only, which would ensure agenda is seeking to promote as an integral part of developing more market-based financing in Europe.
however seeing several issues arise that are mainly due to the that borrowers (who would be inside the EU) would be solely
lack of global harmonisation, as no other jurisdictions around the responsible for the reporting. Institutional investors and their fund managers when pulling out of the securities lending markets, will also miss out on a significant
world have adopted, or are adopting a similar regime. This is a We also recommend that the EC and other EU competent source of income for their end-investors, including retail participants. Furthermore, mandatory buy-ins will make financing (including for
key difference in expectations compared to when the SFTR was authorities involved in international discussions encourage companies and governments) more expensive, as the effect of decreased market liquidity will increase prices.
conceived.
convergence and keep this issue on the agenda for monitoring,
The main issue will be that we expect 60% of all loans with an EU most notably at the Financial Stability Board (FSB). One concrete
counterpart to be out of scope of the SFTR reporting regime, as area where the EU could encourage FSB action is to urge
many securities are lent from outside Europe. A significant piece of international partners to incentivise firms operating in their
the overall securities lending data set could therefore be missing jurisdictions who either lend securities to EU counterparts, or
for a proper analysis of potential systemic risk (also bearing in whose issued assets are active within securities financing, to adopt
mind that public sector securities lending market participants such Legal Entity Identifiers (LEIs), as was mandated by the FSB in other
as central banks are exempt from reporting). similar global initiatives to reduce systemic risk (such as for OTC
Derivatives).

Key Recommendations on SFTR:
To address the current data gap challenges faced by regulators and the industry, largely due to the absence of a common
global approach to the reporting of Securities Financing Transactions (STFs), EU policy makers should: Key Recommendation on CSDR:
1 When reviewing the SFTR framework, propose a move to single-sided reporting instead of dual-sided reporting. 1 Revisit the CSDR’s mandatory buy-in regime and consider allowing the current voluntary system to be the primary
mechanism for dealing with failing trades.
2 Encourage FSB partners to keep monitoring SFTR, and encourage them to ensure that securities lending actors in their
jurisdictions adopt the LEI.