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ISLA MANIFESTO 2024
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Inconsistent interpretation of key terms that are core to securities to Lack of clear regulatory acknowledgement of the positive alignment of
lending & borrowing activity securities lending & borrowing with sustainability

This includes, in particular, inconsistent interpretation Outside of core financial market regulation, the Securities lending and borrowing can actively support for a causal connection between securities lending
across Member States, on the acceptability of a pledge withholding tax landscape across Europe can also the EU’s sustainable finance agenda. It provides vital and undue short-term market pressures and clearly
(security interest over collateral) mechanism for act as a significant barrier to entry for investment, liquidity and a secondary market for sustainable stated that “short-selling and securities lending are
transferring securities as collateral under a securities and further reduce competitiveness. We commend securities like green bonds for example. Transitioning key for price discovery and market liquidity”. They
lending transaction with UCITS. Pledge is a well- Commissioner Mairead McGuinness, in her recent to net-zero and achieving other sustainability goals did not recommend any changes to policy in this area
established mechanism for transferring securities as letter to Mario Draghi, where she highlights as a requires significant capital, exceeding the capacity as a result of their findings. However, in the absence
collateral in, for example, in derivatives markets and priority, greater harmonisation within the single of public finance alone. Private funding for essential of clearly defined sustainability legislation targeting
crucially, enables borrowers of securities to benefit market to iron out divergent national rules, mentioning infrastructure and investments is crucial. Well- investment tools such as securities lending, both
from a better treatment for regulatory capital, as the barriers linked to differing taxation frameworks. The functioning capital markets, facilitated by securities institutional and retail investors may take a stricter
borrower retains a property interest in the collateral recently agreed FASTER Directive aims to make the lending, are key to generating this funding. Securities approach to engagement in the activity, which could
assets and is not exposed to the same risk of non- administrative withholding tax procedures better fit for lending, along with short selling, can increase the ultimately hinder growth in EU markets, as well as
return of excess collateral by the lender. Therefore, cross-border investment and combat the possibilities supply of sustainable securities within these markets. hinder liquidity in sustainable securities.
the borrower may be considered to not be taking any of abuse of taxation rules. However, without a clear This aligns with the CMU’s wider goals and contributes
exposure to the lender which potentially eliminates and consistent definition of for ‘beneficial ownership’ to a more resilient European economy that empowers
the associated risk weights and leverage exposure of securities and a consistent interpretation of OECD the EU to deliver on its objectives under the European
for the bank. In order for UCITS funds to compete guidelines, this can create obstacles for investors Green Deal. Transitioning to net-
fairly with other lenders, pledge-type mechanisms when allocating their investments across international One concern that often arises for asset owners zero and achieving other
should explicitly be considered and made consistent markets thereby potentially limiting the growth of considering engagement in securities lending, is the
with other UCITS regulation as an acceptable form of EU capital markets. Furthermore divergent anti- temporary transfer of shares, including voting rights, sustainability goals
collateral arrangement in a future UCITS review. abuse legislation across EU member states, including to the borrower. This has raised questions about requires significant capital,
retrospective changes of guidance and lack of clear whether securities lending and short selling can align exceeding the capacity of
and unambiguous regulation can result in investors with a long-term sustainable investment strategy. public finance alone.
“Capital markets regulation withdrawing their supply of securities available for The need to attenuate short-termism was one of the
lending from the market altogether.
in the EU is advanced and primary action points under the EU’s 2018 Sustainable
comprehensive. While there is Finance Action Plan. The European Commission, at

scope for further harmonisation the time, was concerned that activities within capital Recognising that securities lending plays an important
in those areas, fragmentation and markets are inducing companies to prioritise short- role in the market and provides investors with
term profit at the expense of the long-term success
additional income, the UK Financial Conduct Authority
obstacles to EU capital markets of businesses, which requires consideration of threats (FCA) has, for example, usefully clarified “we do not
growth can often be driven by a such as climate change. It mandated the European consider securities lending as being incompatible
lack of consistency and common Supervisory Authorities to review the evidence and with ESG, as securities lending arrangements can be
approaches in other areas of report on whether practices within capital markets tailored to meet the ESG objectives of the lending and
law, particularly regarding issues are generating undue short-term pressure in the borrowing parties”.
such as taxation and insolvency real economy, including in relation to securities
that are in the remit of Member lending. ESMA did not find any concrete evidence

States.” 10

10 ESMA makes recommendations for more effective and attractive capital markets in the EU