The Bank of England’s Securities Lending Committee found at its September meeting that a lack of specials activity and continued spread compression presented challenges for market participants in generating revenue from lending activities.
Overall, loan balances were lower than in Q2 and there continued to be a lack of shorts in the market, although short activity had risen slightly in recent weeks. Loan supply had contracted over the summer months, although lenders were using this as an opportunity to analyse their lending programmes and to identify opportunities for revenue growth.
Analysis of data collected via Securities Financing Transactions Regulation (SFTR) reporting indicates potential fallout from Brexit on securities lending and financing activity. The data reveals a 40 per cent decline in trade volumes for transactions reported to European trade repositories, although some members indicated that this may be explainable by reporting anomalies.
85 per cent of all transactions were single-sided reported, which may indicate that the corresponding leg of the transaction is from an institution outside of Europe. However, the committee noted that there is some uncertainty around this analysis, particularly given that selected counterparties (eg central banks) are exempt from SFTR reporting obligations.
In operating securities lending trades, SFTR reporting data indicates that 85 per cent currently transact using traditional transfer of title, with the remainder utilising pledge.
The International Securities Lending Association (ISLA) updated the meeting on the progress of development work on the common domain model (CDM), which provides a single digital representation of trade events across the securities lending transaction lifecycle.
ISLA noted that securities lending transactions are now integrated into the CDM model — a process that ISLA has coordinated in collaboration with securities lending market participants and other trade associations — but further elements may be added, including evergreen transactions and corporate actions.
ISLA also provided feedback on the release of the Clause Library and Taxonomy, on 28 September, which will streamline contract negotiation and bring further standardisation to the application of General Master Securities Lending Agreements (GMSLAs).
There was broad agreement within the meeting that application of environmental, social and governance (ESG) principles and sustainability themes is a primary focus for the securities lending community.
Some asset owners remain concerned that securities are being borrowed by counterparties to fulfil short-term or non-ESG-aligned strategies that may not accord with the lenders’ own objectives. Lenders are seeking reassurance that they will be able to exercise their own voting rights in these situations.
Attendees highlighted a lack of clarity in how ESG objectives should be applied to a securities lending transaction, for example in defining collateral eligibility and whether cash reinvestment strategies are consistent with ESG standards. They also raised questions around whether pledged collateral will be treated in the same way as collateral placed through transfer of title. ISLA indicated that it will address many of these issues in its forthcoming Best Practice Guide.
A presentation to the Securities Lending Committee on tokenisation of collateral — the digital representation of underlying collateral that is traded on blockchain — highlighted the market’s progress in developing facilities to support collateral tokenisation.
This, it said, offers important potential benefits to the market from a liquidity perspective. This includes opportunities for reducing settlement risk through near-instant settlement — and, from this settlement precision, improved ability for firms to assess and fulfil their intra-day liquidity needs more accurately. Additionally, collateral tokenisation may improve mobilisation of liquid collateral and reduce the need for collateral realignment, thereby reducing operational drag and cost.
As part of its work to promote diversity and inclusion (D&I), the Bank of England updated the Committee on its recent ‘Meeting Varied People’ event. The Bank encouraged firms to include a broad representation of staff in its information gathering forum and committees.
The Committee reflected on whether there have been discernible changes in D&I across firms during the pandemic. Attendees believed that recent experience provided a mixed picture. Women in Securities Finance said that some trading rooms were returning to business in much the same way as before the pandemic. It acknowledged that there was still work to be done across the industry in promoting diversity and inclusion and in supporting talent mobility.
