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ISLA MANIFESTO 2024
Therefore, there is a very significant gap between:
(i) total assets held in the EU
(ii) assets that are made available for lending
(iii) assets that are actually lent in the EU market
Two important lessons can be drawn from these numbers:
(i) A significant pool of untapped securities exists within, UCITS and EU pension
funds for example. By making more securities held by these institutions available
for lending, significant liquidity could be injected into the market, that would also
generate additional returns for investors. Pension funds in particular potentially
represent a significant additional source of supply in the future, especially as the
plan structures in the EU become increasingly more capital markets-based.
(ii) Non-EU investors are a major source (75%) of euro-denominated securities supply
for European markets.
The reasons for the significant gaps between available supply & the
amount of securities on loan, are manifold & vary among asset holders
Some arise from within the UCITS and pension funds regulatory frameworks, as well as from direct conflicts
between different frameworks (e.g., UCITS and Capital Requirements Regulation (CRR)). Others stem from
uncertainties resulting from inconsistent definitions, while some are due to the lack of regulatory clarity on the
compatibility of securities lending with long-term, sustainable investing. We consider each one in turn, below.
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Conflict between specific asset management & capital requirements
regulatory frameworks
Whilst UCITS legislation has delivered a largely unified and successful investment vehicle for both institutional
and retail investors, we believe there is scope to further facilitate the participation of UCITS assets in securities
lending to benefit from additional returns whilst also strengthening the competitiveness of the UCITS brand as
a global standard. There are aspects of the regulation as part of Efficient Portfolio Management (EPM) at the
ESMA level, as well as specific variations existing on the local level, that make UCITS less attractive as a source
for borrowing securities, such as:
(i) A term limit of a maximum of seven days on UCITS’ securities lending
activities, which conflicts with the demand from banks and brokers looking
for longer term funding under CRR (e.g., thirty days minimum under the LCR)
– meaning banks can no longer borrow securities from UCITS for regulatory
capital purposes.
(ii) Under the current CRR, UCITS of high credit quality are deemed as unrated
counterparts, thereby increasing capital costs for banks to borrow from UCITS
due to the increased risk weight associated with unrated entities, which
will reduce demand to borrow from UCITS even further, and in turn reduce
market liquidity. This lowers potential returns for UCITS funds that ultimately
serve investors, pensioners, and savers.
On the pension front, the introduction of a Pan-European
Personal Pension (PEPP) product in 2022 was an important
step in the ambition to establish a voluntary personal pension
scheme. Designed as an additional saving option for EU
citizens complementing the existing state-based pensions and
occupational pensions offered by employers, its development
across Member States and take-up has so far been slow across
Europe. Some countries however such as the Netherlands,
Sweden, Denmark, and Norway have for many years successfully
offered effective capital market-based pension fund offerings,
many of which engage in securities lending. As some of the larger
economies are starting to implement their own capital market-
based pension fund products such as Germany, EU-held pension
assets are set to grow significantly, potentially boosting supply
in the securities lending markets if utilised correctly. Any future
review of the PEPP should ensure that the framework is an
enabler of this potential.