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Within the overall collateral mix, we have also tracked to circa 30% of all government bonds in June, some three Securities lending has traditionally been at the forefront
for some time the dispersal of government bonds by times the proportion one would have expected to see. of innovation around how market participants can better
jurisdiction of issue. Looking at the domicile of issue can This most likely reflects that borrowers, faced with falling optimise collateral usage and drive the development of
tell us something about global markets, including how equity values and other collateral shortages precipitated new products. Securities lending in Europe was the first
stressed these markets might be. We have observed by quantitative easing across Europe, had to use more market to embrace the use of equities as collateral, and
previously that although US Treasuries are the most heavily expensive US Treasuries. As we fast forward to the end through the provision of increasingly complex product
borrowed government bond asset class, they do not figure of the year, the overall collateral usage of government offerings, vendors can now support multiple client business
heavily in underlying collateral pools here in Europe. US bonds in tri-party returned to a more familiar pattern, with models. As we look to 2021, all the experience and know-
Treasuries tend to be heavily borrowed as they may be US Treasuries falling back to 11% of all government bond how that exists in our markets will be needed to work with
used for multiple purposes and tend to command a lending collateral, and European government bonds and JGBs clients to provide innovative and novel solutions to support
fee premium. Consequently, it was surprising to see that making up 47% and 33% of the remainder of the pool new business settings. The most prominent and potentially
the proportion of US Treasuries in lending pools increased respectively. radical impact to our markets will be the increasing
number of institutional clients who are adopting an ESG
ethos within their investment process. In this regard, the
selection of collateral and in particular the screening of
9% any collateral received against ESG criteria, will present
several important challenges for our markets. Due to the
11% absence of any real taxonomies and definitions to support
29%
sustainable finance, it will be incumbent on industry

practice as a proxy for regulation, at least in the short term.
Fig 18: Governement Bond associations to work with their members to develop best
Collateral Held in European We have highlighted before that ESG and the principles
Tri-party by Domicile of Issuers 46% 47% associated with sustainable finance are essentially part
Source: BNY Mellon, Clearstream, of a values-based framework that can conflict with the
Euroclear & J. P. Morgan traditional rules-based regulatory frameworks that we are
all familiar with. We are therefore mindful that trying to
incorporate the former into a rules-based prudential world
needs careful thought so as to ensure we achieve the right
Europe
33%
Asia
24% outcomes for all relevant stakeholders.
North America Through its Collateral Steering Group (CSG), ISLA is already
Other
working with its members to develop ESG collateral
best practice guidelines as part of an overall ESG Policy
Framework. The Policy Framework will support our
members and wider industry participants to properly align
securities lending with the broad aims and objectives of an
ESG investment framework.

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