Context is Key
This blog post is an excerpt of Andrew’s foreword to the ISLA H1 2024 Market Data Report. You can read the full report here.
While data is at the heart of our industry, correct context is key. The financial services sector is now more than ever reactive to external influences from the economy, new technology, and geo-politics, that without this context on how external factors are impacting data trends, erroneous conclusions about the state of the industry could be drawn.
Since the inaugural ISLA Market Report in 2014, no single theme has influenced our market commentary as much as financial regulation. From short selling reviews to the EU Money Market Reform, and from SFTR reporting to Basel prudential implementation, our industry has been so directly and indirectly intertwined with varying pieces of legislation, that to be successful in this business, a deep understanding of the regulatory landscape is paramount.
A decade down the line and the backdrop is no different as we find ourselves gripped in the thralls of Accelerated Settlement and on the brink of finalising the Basel III Endgame. However, as political, and regulatory agendas become increasingly connected, so does the need to add ‘public affairs’ to the growing list of necessary skills as the industry searches for future growth.
I’ve already written about 2024 being the year the world goes to vote, with leadership contenders across the world speaking on everything from inflation and migration to the green agenda and defence budgets.
Deep and open capital markets are one of the strongest indicators of a healthy economy and with governments hoping to bounce back after recent disruptions, many politicians are keen to highlight their economic prowess by discussing previously niche topics of financial regulation and central banking, while working with industry and regulators to build more robust and competitive capital markets.
A case in point is the EU’s Capital Markets Union (CMU). Launched in 2014, the CMU aims to unlock the potential for growth in capital markets, however progress has been stunted due to the ever-present tug of war between the long-term ambition of the European Commission and the near-term priorities of the Member States. As Europeans went to vote in June, polls predicted that there would be heavy gains for the Eurosceptic far right parties, however, the three pro-EU groups managed to maintain their majority in the Parliament. Nevertheless, the rise of the populist parties in national governments, and thus representatives in the European Council, will likely impact the direction of travel in the future.
As policy makers take up their new roles, ISLA will be active in Brussels and across Europe, working to position securities lending as a tool to support the aims of the CMU by helping to unlock untapped supply to aid liquidity, and tweaking existing rules to make them more capital efficient. You can read our full suite of policy recommendations in our manifesto document here.
Accelerating the settlement cycle to T+1 is a key example of the blurring lines between regulation and politics with many governments viewing the shortening of settlement times as a driver of growth and global alignment, so much so, that the move to T+1 has quickly moved from an ‘if’ to a ‘when’. It has become a popular subject of debate with supporters arguing for reduced settlement risk and increased efficiency, while opponents raise concerns over its necessity, operational challenges arising from the fragmented nature of Europe’s infrastructure and potential unintended consequences. Where normally an analysis of the costs and benefits should be made clear, global competitiveness seems to have taken precedence.
With financial stability across the globe being a key area of economic policy to watch out for and as raising additional funds through taxation to incentivise investment flows becomes a priority to fund future expansion, the rise of far-right parties in Europe may hinder EU-level development on grounds of national sovereignty.
With a potential re-write of Basel III front and centre in the US, short-selling bans grabbing headlines in Asia, and the opening up of markets in the Middle East, the importance of well measured engagement with not only policy makers but also politicians, regulators and wider stakeholders has never been greater.
At ISLA, our advocacy remit continues to grow with active engagement across EMEA to influence on behalf of the industry and keep an open dialogue with members, through our working groups. I would like to thank our members for their invaluable contributions and continued support.
The industry will no doubt continue to be shaped by regulatory and political agendas which can create both opportunities and risks, however with data and the correct context setting, I’m confident that securities lending will continue to grow and demonstrate its vital contribution to a healthy and robust global financial system.
Andrew Dyson
ISLA CEO
