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ISLA MANIFESTO 2024
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How Securities Lending &

Borrowing Contributes to

a Healthy Financial System

Makes financial markets more liquid Reduces operational risk in the system
and more efficient – providing access – making securities available where
to securities for banks and brokers to they are needed, thus ensuring timely
meet their market-making commitments settlement of financial transactions, and
and obligations towards clients and EU ensuring market stability.
governments.

Provides a low risk means for Is vital for the ability of EU financial
investors to generate additional institutions to meet their risk
management regulatory capital
portfolio income – lenders/owners of requirements, thus reducing systemic
securities are the ultimate beneficiaries of
the income generated from the securities risk in the system. EU legislation requires
they lend in return for a fee. The revenue banks and other market participants to reduce
can be used to offset operational costs risk by ‘collateralising’ their exposures to
thus improving the overall performance counterparties. Examples include:
of the portfolio and increasing returns for (i) Meeting margin requirements under
long term investors. derivatives regulation (EMIR), thus
ensuring the stability of clearing houses.
(ii) Meeting the Liquidity Coverage Ratio
(LCR) and Net Stable Funding Ratio
requirement for banks to hold high
Supports the increase of retail quality securities under the Capital
participation in capital markets - the Requirements/Basel framework.
emergence of low-cost retail investment Securities lending and borrowing
products (e.g., tracker funds such as
ETFs) is in part due to management costs makes financial markets more liquid
being supported by revenue gained from
securities lending. By making investing in the Is an important part of market
financial markets more appealing at a lower operations of the ECB & NCBs – to and more efficient
cost, securities lending stimulates retail implement EU monetary policy and
investment flowing into the capital markets. promote financial stability. Central banks
can use securities lending for quantitative
easing to increase supply, by purchasing
government bonds and other financial
assets from banks and then lending them
back into the market.