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ISLA MANIFESTO 2024
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Core Funding Markets, such as Securities Lending & Borrowing, A European Strategy to Bolster
Can Play a Vital Role in Supporting Competitive European Capital Core Funding Market Channels
Markets What this calls for is a strategy to tap the potential of
securities lending and borrowing, to help meet these
All of this places an onus on the importance of The landmark Eurogroup statement on 18 March needs. Such a strategy ensures that both securities
private sector capital to fill much of the investment 2024 puts it well: and collateral can be mobilised at all times, and
gap, taking some of the pressure off the public in sufficient quality and quantity between market
purse. However, this shift also comes at a time of participants. The upside is that there is significant
geopolitical fragmentation that itself threatens global “An open, liquid capital market untapped potential of securities supply held in
investment flows. In such a context, it is crucial which is well integrated into global portfolios of European-based lenders, such as UCITS,
for EU policy makers to prioritise safeguarding markets is important to support pension funds and insurance companies not yet
and empowering all core funding market channels. the flow of private investment mobilised for securities lending. This can truly further
Whilst perhaps currently not the most prominent into innovation, including in the support liquidity and collateral availability, if fully
consideration in policy maker’s minds, securities green and digital sectors. With the deployed.
lending and borrowing is one such channel, and can limited fiscal space and multiple
become a key tool to unlock capital, enhance market spending priorities, funds to build Getting to where we need to be requires a
liquidity and support investment across the EU – the comprehensive, two-pronged approach focused
foundations for competitive capital markets. up production capacity and boost on unlocking the funding potential from securities
innovation in Europe, need to come lending and borrowing (and other similar securities
Indeed, securities lending and borrowing is a vital primarily from the private sector.” 4 financing markets) that addresses both:
mechanism for providing liquidity in both traditional
asset classes (such as company shares, corporate
and government bonds), as well as in emerging new Furthermore, former Italian Prime Minister Enrico (i) supply and demand challenges
asset classes (such as green bonds, digital assets, Letta’s recent report on the state of the Single (ii) regulatory and operational challenges
and perhaps in the future, defence bonds). A liquid Market, equally underlines this liquidity imperative: that limit the additional provision of
secondary capital market is crucial, not only for liquidity
the ability of companies and governments to fund “In the face of constrained public budgets,
themselves in the primary market, but also to the private capital can also be key to developing This needs to become an area of much greater
attractiveness (and therefore competitiveness) of new green (transport, energy, etc), and digital political focus than it has been to date. Given the global nature
Europe’s capital markets. This is because more liquid infrastructures. This requires unlocking of financial markets...it is
secondary markets tend to lower the cost of funding. the substantial liquidity available among important that EU policy
institutional investors, such as pension funds making takes account of
and life insurers.” the competitiveness of EU
5
financial markets versus other
Securities lending and borrowing’s importance jurisdictions 6
to market liquidity stems from its status as one
of the most efficient mechanisms to facilitate the
flow of securities between demand and supply, in
a well-established and secure manner. Bolstering
core funding markets like securities lending and
borrowing will serve the needs of market participants
across the entire financial services value chain.
4 Eurogroup statement (18 March 2024) https://www.consilium.europa.eu/media/70782/peg-to-pec-letter-march-2024-final.pdf (pg 6)
5 Enrico Letta report ‘Much more than a market’ https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by- 6 ESMA position paper ‘ Building more effective and attractive capital markets in the EU’ https://www.esma.europa.eu/sites/default/files/2024-05/
enrico-letta.pdf (pg 31) ESMA24-450544452-2130_Position_paper_Building_more_effective_and_attractive_capital_markets_in_the_EU.pdf
