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ISLA MANIFESTO 2024
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2. Optimising & Enhancing Demand Channels 3. Advancing EU Infrastructure to Further Drive Foreward

Market Efficiency & Digitisation
The demand to borrow securities is primarily from banks and brokers to:

Allow the new CSDR Framework to bed in for securities lending &
(i) cover the short positions of their clients borrowing, to play its role helping to reduce settlement fails.
(ii) facilitate market making obligations Europe now has a stronger, albeit fragmented, securities Although Europe has made significant progress, its

(iii) manage collateral positions settlement framework Central Securities Depositories unique and diverse settlement infrastructures and
(iv) meet capital and LCR requirements Regulation (CSDR), to build from and pave the way legal frameworks will render the transition more
(v) facilitate delivery of securities in a timely manner to avoid operational fails for a more integrated and competitive EU market; a complex than those of other jurisdictions. In addition,
framework within which securities lending can play progressive penalties for settlement fails could make
(vi) hedge derivative positions
its role to prevent settlement failure and thus increase lenders more cautious of relinquishing their supply
efficiency and liquidity across the board. to assist with settlement failure. Most importantly,

To fulfil these roles effectively, borrowers require timely access to a broad range of lenders to secure the amount In a recent consultation, ESMA stated that ‘securities the complexities of managing progressive penalties
and type of securities required. borrowing is usually the easier way to prevent would be a huge administrative burden and cost to
Of these, the cover of short positions probably constitutes the most significant reason for market participants to or resolve a settlement fail caused by the lack of both lenders and borrowers, potentially discouraging
participation by smaller market participants and with
borrow securities. Despite its sometimes negative connotations, short selling constitutes a key component for any securities’, and also ‘one and a half years after the start uncertain benefits.
developed financial market. It is generally accepted by global policy makers as vital for any developed financial of the application of cash penalties….settlement fails
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market, providing important price discovery and liquidity to the financial ecosystem as outlined in ESMA’s recent are occurring less frequently’ due to the establishment In order to maintain EU competitiveness while ensuring
report on Securities Finance Transactions 2024. At the beginning of the year, ESMA also released a detailed review of standardised rules pertaining to CSDs and their efficiency and deeper liquidity, further time is needed
of the effects of short selling bans as a result of the pandemic in 2020 on financial markets which delivers a fact- participants, thereby moving the EU closer towards for the CSDR penalty regime to bed in, in order to
based and balanced view, in effect confirming the significant role that short selling plays for efficient capital market its goal of maintaining a developed, integrated single accurately measure its effectiveness in the long term,
functioning. A recent report from S&P Global Market Intelligence in March 2024, stated that short interest across market. and to better recalibrate the current penalty rates for
EU equities had fallen to the lowest levels in a decade. In order for the EU capital market to increase in instrument types with continuously high failure rates

The current Short Selling Regulation (SSR) in the EU stands out as having some of the most stringent requirements size and liquidity, securities lending and borrowing (such as ETFs), so long as this does not disrupt the flow
of capital.
when compared to the US and the UK. One way to enhance the competitiveness of the EU capital market, would must be proactively supported, as it is the obvious
be for EU lawmakers to carefully consider the most recent changes to SSR introduced in the US and the UK. solution to secure settlement efficiency. Imposing Subject to the above, the introduction of an accelerated
additional (or progressive) penalties, as part of the settlement cycle in the EU, will certainly help to
upcoming review on this type of transaction, would be advance post-trade inefficiencies, but also reduce
Recommendations counterproductive. systemic risk in the financial system, by reducing

Europe should support the demand for the borrowing of securities through effective and pragmatic regulation and Hence, new proposals emerging from policy makers exposures over the settlement period. It is a significant
step to modernise capital markets in Europe and
review the SSR accordingly. Key aspects of the EU SSR review should include: to introduce progressive penalty rates under CSDR, maintain global alignment. A shortened settlement cycle
without conclusive evidence to suggest that the
I Revising the public disclosure of individual net short positions with aggregated net short position current regime is not being effective, could potentially would enhance the attractiveness to invest in Europe;
with trades settling the next day instead of the current
reporting to reduce imitative behaviour. exacerbate liquidity concerns across the EU. The T+2 standard, investors can free up their capital faster
additional operational complexity and cost involved in
investing in Europe may act as a barrier to entry when and re-invest sooner, allowing for the potential to
II Increasing the disclosure threshold for net short position reporting from 0.1% to 0.2% to reduce firms are considering investment here versus other generate additional returns.

administrative burden for firms, with the option to reduce to 0.1% in particular market circumstances jurisdictions. Especially if a new progressive penalty
through ESMA’s supervisory powers. regime was to be rolled out in tandem with a focus on
accelerating the settlement cycle.

12 MSCI developed market classification ‘Existence of a regulatory and practical framework allowing short selling.