Securities lending and borrowing is primarily an over the counter (OTC) activity and a well supervised practice that contributes to the overall health and functioning of global financial markets. It is mostly conducted by prudentially regulated entities and regulated indirectly via various pieces of legislation globally, including MiFID and SFTR in Europe and 10C-1 in the US.
In 2015, the FSB published recommendations for improving oversight and data collection in the global securities financing market. These recommendations aimed to enhance transparency and reduce systemic risk. In Europe, the Securities Finance Transaction Regulation (SFTR) 2015/2365/EU was introduced, and, in the US, the SEC 10C-1 rule was introduced.
SFTR targets all securities financing transactions including securities and commodities lending and borrowing transactions, repurchase transactions, buy-sell/sell buy-back transactions, and margin lending and borrowing transactions. SFTR mandates detailed reporting of securities financing transactions to repositories, enabling regulators to monitor risks related to these activities more effectively.
10c-1 was also introduced to address the lack of transparency in the securities lending and borrowing market.
Beyond the EU SFTR and US10C-1 frameworks, several other pieces of legislation touch upon and indirectly regulate the securities lending market. This includes, amongst others:
- The EU UCITS Directive, which has rules and restrictions around the use of Efficient Portfolio Management (EPM) techniques of which, securities lending is the most common, with requirements for daily liquidity and restrictions on ‘term lending’, where borrowers are guaranteed use of securities for a defined term.
- The global Basel Framework also impacts securities lending and borrowing, through minimum haircut floors for securities financing transactions, and the standardised approach for credit risk for unrated counterparties. The standards for the calculation of RWA for credit risk, include rules pertaining to the treatment of non-centrally cleared SFTs with certain counterparties, which aim to limit the build-up of leverage outside of the banking system.
- The EU Bank Recovery and Resolution Directive (BRRD), which directly impacts securities lending through its focus on the recovery and resolution of failing banks. The BRRD establishes a set of tools and powers for regulators to intervene in a failing institution, thus minimising the impact on financial stability and ensuring continuity of critical functions.
- The EU Shareholders Rights Directive II (SRD II) improves shareholders’ ability to exercise their rights across multiple markets whilst utilising technology to enhance communication between firms, intermediaries, and the shareholders. In terms of securities lending, once a security has been transferred as part of a lending agreement, all the rights are also transferred to the borrower, including the right to vote. ISLA supports the Bank of England Money Markets Code (Chapter 4 – Securities Lending; Voting Rights and Benefits Section 6.2-6.4) approach which states that market best practice is not to borrow securities for the sole purpose of exercising the right to vote, and any lent shares under a securities lending agreement would have to be recalled for voting at general meetings. SRD II helps increase transparency to issuers of securities.
Visit our Regulation & Policy section for more detailed information on these and other regulations impacting our market.
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