Securities Lending Committee | UK Money Markets Code
Over the past two weeks I have had the opportunity to participate in two regular forums hosted by the Bank of England, as part of their role in overseeing our markets. The first was the Securities Lending Committee (SLC), where we discussed amongst other things current market trends as well as structural developments that will deliver change over time. Here, much of the focus was around topics such as tokenised collateral and ESG, that epitomize the general direction of travel for the industry. Similarly, the meeting a few days later that looked at the UK Money Markets Code, pulled in themes such as remote working practices and the broader themes of diversity and inclusion. There is no doubt that if we consider these forums as something of a reflection of our industry, we are seeing a vibrant and diverse environment that shows our capacity to embrace change in a pragmatic and positive way.
Having said that and notwithstanding the very forward-looking agenda I see in our markets today, there were two areas that dominated much of those discussions, yet people felt should be consigned to the depths of history; the first being the often-divisive issue of fails.
As a market that moves vast amounts of securities every day, there are manifestly elevated levels of operational risk across the chain. Indeed, the challenges that we all grapple with in Europe are nothing new. In 2001, the Giovannini report on cross-border clearing and settlement arrangements in the European Union concluded that ‘…it is clear that fragmentation in the EU clearing and settlement infrastructure complicates significantly the post-trade processing of cross-border securities transactions relative to domestic transactions. Complications arise because of the need to access many national systems, whereby differences in technical requirements/market practices, tax regimes and legal systems act as effective barriers to the efficient delivery of clearing and settlement services. The extent of the inefficiency that is created by these barriers is reflected in higher costs to pan-EU investors and is inconsistent with the objective of creating a truly integrated EU financial system.’
The report went on to highlight ten specific barriers to efficient cross-border clearing and settlement in the EU. These included technical differences in markets across Europe, the need for participants to use multiple systems, differences in national rules relating to corporate actions, beneficial ownership and custody, as well as differences in security issuance with national restrictions on the location of securities. For any of you familiar with the post trade environment today, much of this will already be familiar as some twenty years on from the Giovannini report, most if not all of these issues are still with us. If reform was needed in 2001, then that has now become something of a settlement emergency today. In response to this, we have seen the arrival of Central Securities Depository Regulation (CSDR), however and frankly speaking, rather than addressing the structural landscape across Europe, it simply fines people for behaviour that may on many occasions be of no fault of their own. Regulators will argue that penalties do change behaviour and to an extent this is true. However, it does look at the heart of the matter. If Europe wants to deliver on its ambitious plans around the Capital Markets Union, it could do far worse than digging out the Giovannini recommendations as a starting point for that initiative.
The other issue I wanted to touch upon has again something of a strong historical resonance for our markets, notably here in the UK.
In July 2002, Laxey partners borrowed some 6% of the share capital in a company called British Land, with the primary objective of voting against the then management. While the details of this case are less relevant today, the very action of borrowing securities to influence a vote at an Annual General Meeting must been seen as market manipulation no matter what era you are judging events by. This and similar instances led directly to the UK Money Markets Code which when reissued in April 2021, stated very clearly that ‘It is accepted good practice in the market that securities should not be borrowed solely for the purpose of exercising the voting rights at, for example an AGM or EGM ’. It further states that, ‘Lenders should also consider their corporate governance responsibilities before lending stock over a period in which an AGM or an EGM is expected to be held.’
Similar sentiments are also enshrined in our own guide on Voting Practices & Shareholder Engagement, that was developed and published in conjunction with four other regional securities lending associations late last year. Furthermore, I would also highlight the specific Borrowers’ Warranties provisions within the Global Master Securities Lending Agreement (GMSLA) 2010 Agreements, where 14(e) states, ‘It is not entering into a Loan for the primary purpose of obtaining or exercising voting rights in respect of the Loaned Securities’.
It was therefore disappointing to recently see the open use of securities lending to gather votes ahead of a public AGM. Whilst our position is very clear on this issue, I would also stress the reputational damage this type of activity could have on our industry. Set against a progressively engaged institutional investor community, it is vitally important that we work with this community and other relevant stakeholders to ensure that those with the right to vote can do so in an open and transparent way.
By way of concluding thoughts, there is a tremendous amount of work that we as an industry do, that we can be positive and proud about. On occasions however, we must reflect upon lessons learnt from our past, and what they tell us about where we are today; this might be one of those moments.
Andrew Dyson
