‘Shadow banking’ was one of the worst terms that could have been coined to describe activities such as securities lending, according to Steven Maijoor of the European Securities and Markets Authority (ESMA).
‘Shadow banking’ was one of the worst terms that could have been coined to describe activities such as securities lending, according to Steven Maijoor of the European Securities and Markets Authority (ESMA).
Maijoor was addressing attendees of the International Securities Lending Association’s (ISLA’s) annual conference in Prague. He was the first of two keynote speakers to take to the stage.
The ESMA chief gave an overview of the authority’s objectives—to protect investors, ensure the stability of European financial markets, and create a single rulebook for the EU’s 27 member states—before focusing on securities lending and the effects of related regulation.
Of shadow banking, he said it is “one of the worst terms that could have been invented for these activities”, as most are already adequately regulated and supervised.
But concerns do remain, including the opacity of activities, interconnectedness with more mainstream sectors, the size of business—Maijoor said that shadow banking covers some 9 trillion assets—and how best to regulate it, with more transparency needed.
On transparency, Maijoor said that he had discussed the need for more securities lending data, which regulators cannot access, with ISLA representatives at the conference.
Maijoor said: “[The] industry is willing to be helpful and give [regulators] a better picture of the market.”
Moving on to ESMA’s own regulatory initiatives, Maijoor explained that the authority’s consolidated guidelines on exchange-traded funds and other UCITS issues and repo and reverse repo agreements were not the result of negative feeling, but a necessity.
Among the more controversial guidelines was a requirement that all fees arising from securities lending, net of costs, “should be returned to investors”.
Maijoor stated that this “high-level principle” is in the interests of the market, and that any attempt to circumvent it may need to be addressed through regulation.
In a panel on collateral use, a panellist reaffirmed the long-held view that securities lending and repo desks should move closer together to provide a better overview of collateral.
Prior to the panel, attendees were asked whether the desks should move closer together, with 92 percent of respondents to the e-survey saying that they should.
One panellist agreed, after pointing out that a ‘global collateral shortfall’, as some have described it, may be off the mark, with more than 70 trillion securities available worldwide.
The panellist suggested: “Securities lending and repo desks should move closer together, as a lot of collateral is wasted. Coming together is more efficient.”
Another panellist said that as central banks stop pumping liquidity into markets, the practice of collateral multiplication, in which counterparties re-use collateral to create new credit lines, may be affected.
This could “hurt the real economy” in turn, the panellist explained.
Trade repositories for securities lending data came under fire during another panel discussion.
Warehouses of securities lending transaction data—similar to those for OTC derivatives markets, whose creation was legislated in the US Dodd-Frank Act and the European Market Infrastructure Regulation—are not yet a reality, but are already being discredited.
More than half of attendees participating in ISLA’s e-survey doubted their ability to reduce the potential for systematic risk in securities lending, with panellist Richard Thompson of Northern Trust saying that regulators’ focus on data might be missing the point of transparency.
He said that more data does not mean better transparency: “[It’s] not just about data; it’s about context and intent.”
Rather than trying to create trade repositories for specific transaction types such as securities lending, regulators should focus on the system as a whole, he said.
