Regulation…Technology…Harmonisation
1 October 2019, London
Conference Co-chairs: Michelle Gray, Operations Executive, J.P. Morgan & James Montgomerie, EMEA Regional Head of Securities Lending & Financing Middle Office, Morgan Stanley.
The format of this year’s morning was a mix of updates, presentations and panels, reflecting upon some of the key business, regulatory and advocacy areas impacting securities lending decisions across all aspects of trading, operations and post trade.
Opening Keynote Address
ISLA was delighted to have Mirza Baig, Global Head of Governance & Stewardship, Aviva Investors deliver the opening address at the conference. It provided a vivid backdrop for the rest of the day.
This short presentation titled, Investing for the Future: Navigating Technological Disruption explored how the fundamentals of the investment decision making process are being challenged in new and different ways. Disruptive technologies including AI, the use of big data, and robotics are redefining winners and losers across the industry. This increasingly fast moving investment landscape is also being heavily influenced by the sustainable finance agenda, where investors are demanding that investment portfolios reflect the principles enshrined around the ESG ethos. The session concluded with a case study looking at the auto industry, which highlighted how complex and diverse these different factors are and how they can pull the investment markets in different ways at the same time.
Presentation: ISLA 2018/2019 Update – A Year In Review
Andrew Dyson gave a brief overview of the Association’s work around Advocacy, Regulation & Market Practice, Legal Services, Communications, Events as well as New Website & Branding during the past 12 months. In particular, he highlighted how the role and focus of ISLA is evolving to reflect the changing needs of its members and broader stakeholder community. In a post regulatory implementation world where much of the work to deliver both SFTR and CSDR is either done or substantially underway, he discussed how the drive towards further efficiencies is being seen through the lens of digitalisation. He also sought to remind the group that notwithstanding the prominence of Brexit for those of us in the UK, a new European Commission is beginning to outline its plans for the next five years, and aligned to this, ISLA is developing a ‘Manifesto’ on the role of securities lending across the EU27.
Panel Session: Key Business Drivers Impacting Our Markets
This first plenary session of the day sought to review the current state of the securities lending markets, and put some of the subsequent sessions into better context. The panel discussed how the market in Europe is being influenced by a number of different factors. Demand side pull from hedge funds is still at historical low levels, as Europe grapples with the uncertainties of Brexit as well as the slowing of the German economy that will limit growth and investment opportunities. The panel agreed that the regulatory overhang from the ongoing implementation of SFTR and CSDR is constraining investment in the business, and diverting resources away from new markets and business ideas. Somewhat counter to the earlier demand side view, the supply of new assets and clients coming back to the market or entering, is still strong. Low real invest returns and the role that securities lending can play as a generator of incremental alpha was noted here. The panel also sighted the impetus created by the rolling implementation of UMR waves five and six, that is pushing institutional investors to look at different ways of mobilising and transforming collateral. Securities lending has a key part to play in that process.
Taking the lead from the opening keynote address, the panel also discussed how ESG principles are running through the investment industry with Europe taking a prominent lead in this area. Whilst it was noted that securities lending is something of a second order issue in that it is not part of the investment process, there are some important considerations that our markets have to take into account. These include the development of appropriate collateral screening and tri-party sets, as well as understanding how securities lending can flourish whilst allowing the investor to execute on their governance responsibilities.
Panel Session: Joint ISLA/ICMA/SWIFT Technical Update
On behalf of the ISLA & ICMA SFTR & CSDR Working Groups as well as SWIFT, a joint presentation on the extensive work of the various workstreams across all organisations, including implementation outlook.
This joint update session allowed delegates to hear from ISLA as to where the industry is in terms or preparations and readiness for SFTR and CSDR implementation. Due to the interconnected nature of much of this work, representatives from ICMA and SWIFT also joined the panel to provide a broader cross- industry perspective. It was noted, that notwithstanding the considerable work that is being done on a cross-industry basis, there is still a dependency on the provision of further level 3 feedback from ESMA on various outstanding data points and related issues. The discussion also highlighted the important role around the provision of issuer LEIs. All acknowledged the practical difficulties in both securing issuer LEIs as well as the implications upon collateral acceptability if specific securities that do not have an LEI, are excluded from collateral profiles in Europe. The recently published ISLA paper on LEIs was referenced during the discussion as an important statement in opening up this debate within the industry and amongst broader stakeholders. In addition to the normal product or industry level updates, the participation of SWIFT added further colour around the necessary messaging and communications formats that will be needed to comply with the requirements of SFTR. A recent readiness survey was highlighted as suggesting that large numbers of market participants are still to engage fully around SFTR and their respective reporting obligations. In response, the panel felt that this survey whilst accurate may not reflect the full picture, as many who indicated a lack of readiness are in fact expecting to outsource much of the reporting obligation. The session also touched up the development of industry best practice as well as the complexities that are being presented around the work that ISLA is doing to develop a coordinated and consistent view around the definition and execution of corporate actions.
Panel Session: Realities of Implementation
In this final session of the morning, the panel tried to bring the themes of the earlier technical updates together, looking at the day to day realities that many firms are dealing with. There was clear recognition that the implementation of mandatory reporting through SFTR and settlement fines and mandatory buy-in regimes that are part of CSDR, are pushing greater investment and focus into the back office. Many felt that the post trade environment has for too long been starved of resources, and that recent changes of direction and renewed investments were welcome. Drawing upon the experience of earlier mandatory regimes such as EMIR, all felt that it was important to manage the expectations of market participants, notably institutional investors who may be exposed to the vagaries of the initial go live reporting and the matching environment, both of which could be problematic. It was suggested that key institutions such as the agent lending community have a key role to play here in terms of education and setting expectations.
The afternoon sessions focused on technology and its role from a number of different perspectives; regulatory reporting, digitalisation, harmonisation and continued evolution.
Presentation: Digital Regulatory Reporting
The afternoon was opened with a presentation from Francesca Hopwood Road, Head of RegTech and Advanced Analytics at the Financial Conduct Authority (FCA). Francesca outlined where they are in the development work that they have been doing in respect of digitalised regulatory reporting. Recently, the FCA undertook a small scale trial on how digital reporting may be used, over time, to replace existing reports or rules-based reporting obligations. These trials identified significant potential cost and time savings over existing data gathering frameworks. In particular, the inclusion of specific code within trading and settlement infrastructures could allow regulators to access information in a more timely way, and allow them to define more easily specific data sets that they want to access. To make these digitalised environments work effectively, it was noted that there needs to be a high quality and universal set of principles around data and life cycle events. Without this, digital reporting will be no more efficient than its present day equivalents. In this regard, the work that ISLA is leading on in the creation of a digitalised world for our markets was highlighted from the floor. We understand that the FCA will come forward with further ideas in this area in due course.
Panel Session: Technology – Realising the Operational Benefits of Digitalisation
This session set out to try and strip away some of the noise around digitalisation, with real practitioners discussing their experiences. In previous conferences and events, there has been much debate around the deployment of emerging technologies such as Blockchain and Distributed Ledger Technology (DLT). The feeling has often been that these are solutions looking for problems. During this session, the group discussed how a business such as HQLAx has been able to deploy new technologies such as tokenisation to our markets. At the same time, the challenges that they have faced as they try to link the digital world with the analogue environments that we live in today, were also acknowledged. In particular, they highlighted how important it is to get the interfaces between these two quite different environments to work, without disruption to underlying business and trading flows. Sitting behind initiatives such as tokenisation is the increasingly important role of data. A Common Domain Model (CDM) is a single, market wide domain; it is a common data representation of transaction events, used by the market as a whole. That common data representation is the foundation for the development of solutions that are scalable, efficient and future proof for our market. Without broader adoption of CDM frameworks, it will be increasingly difficult to realise the benefits derived from these newer products. The session also highlighted how the role of documentation and client on boarding can either slow down or impede the speed to market for clients or new products. In this regard, Linklaters highlighted how already in the derivatives world, services are being developed that will facilitate more efficient legal process and aid client on-boarding.
Panel Session: Technology – The Vendor Evolution
The vendor session allowed infrastructure, platform and systems providers to talk about their product suites, and where they fit within the increasingly complex post trade world around our markets today. Securities lending has traditionally embraced the use of vendors, and the current regulatory landscape is forcing greater use of vendors of all types, as firms push for compliance around these new rules. The session looked at how pricing and usage models may have to change to reflect changing client and user requirements. Those that have traditionally deployed mainframe type solutions, today tend to use software applications. A number of those present felt that adoption and appetite for change was limited, as budgets are constrained especially when you move away from regulatory requirements. There was also some discussion as to how hard it is for clients to potentially move away from existing providers who are embedded within the fabric of their institutions. An audience voting question suggested that ‘resistance to change’ was the single biggest factor that limited change. This raised interesting questions about the nature and direction of our industry, as this group looks past the imminent opportunities associated with SFTR and CSDR.
Panel Session: Making Sense of It All
This short wrap up session bought the day to a close. As previous session moderators became panellists, they summarised the mood of the industry and the challenges it faces. There was much debate during the day about innovation and the role that technology can play as the industry looks to the future. Despite some feeling that the industry lacks innovation and creativity, others felt that innovation was there and it just needs to be recognised. SFTR and CSDR are driving changes in behaviours, some of which is overdue in terms of the post trade world we all live in. SFTR in particular has set the industry along a digital road which will realise incremental benefits over time. It will be incumbent upon us all to think about how we do that.
For full details of this year’s agenda, speakers and a gallery of images, click here.
Thank you to Michelle, James, our delegates, speakers and sponsors for their support. See you in 2020!
Sejal Amin, Head of Events, Marketing & Communications
