Minutes of the Securities Lending Committee meeting – November 2021

Minutes

Item 1 - Bank of England Introductory remarks and minutes from last meeting

The Chair confirmed that the minutes of the September 2021 meeting were published on the Bank of England’s (BoE) website and had no comments to raise on the minutes from that meeting.

The Chair welcomed D&I attendees to the meeting.

Item 2 – Dr Radek Stech - Global Principles for Sustainable Securities Lending CIC, presentation – Sustainable finance principles and securities lending: a transparency update

The content of this presentation is not included in these minutes.

Item 3 - Recent market trends and observations

The Chair asked for views on key revenue drivers over the last few months, as well as any other recent trends in the securities lending market.

It was noted that recent data indicates that around 15% of all securities lending transactions are executed using pledge rather than title transfer.

The Committee discussed Agent Lender Disclosures, some members suggesting that it is an area that needs to improve. Committee members discussed whether the current agent disclosure model is still fit for purpose; a number suggested that it was not, and has not been for a number of years. Committee members noted that SLC trade bodies are working on potential new systems, and asked for an update to the Committee in a future meeting once a new system is approved. The Committee agreed to discuss these points, including RWA disclosures, in more detail at the next meeting.

The Committee also discussed some recent areas of revenue weakness. It was noted that 2021 was a tougher year for specials. Revenue generated through specials has masked underlying volume flows in the market, which have been below the level of recent years. However, there is an expectation of some trading opportunities towards the end of the year for companies that benefitted from the pandemic, such as home gym companies, as well as companies that will struggle from continued chip shortages.

The Committee then discussed recent analysis of Securities Financing Transactions Regulations (SFTR) data by ICMA. This showed that up to 90% of European collateral borrowing came from non-EEA funds. And while there are some caveats, which mean they true number may not quite as high, this shows large reliance on US and Middle Eastern funds. This has increased from 60% a few years ago.

The Committee also noted that while UCITS, the most common investment wrapper in Europe, has a number of benefits, it often restricts securities lending activity. Some members suggested that the regulatory community need to look carefully at the terms of UCITS funds, in order to make them more lendable whilst preserving the benefits of the UCITS fund model. Without such a future change, it was felt there could be an increase in the risk of credit and liquidity squeezes.

The Committee also discussed some upcoming difficulties in the industry, noting that sourcing US collateral is likely to get more difficult in 2022. There are existing CSDR liquidity challenges for US borrowed securities such as requiring dollar cash collateral. This can be difficult to turn around in time and is frequently causing daily fails, but from February next year this will also come with a CSDR penalty.

Item 4 - Environmental, Social and Corporate Governance (ESG) in Securities Lending Markets

The Committee noted the importance of ESG, and recognised that ESG has transitioned from concept to industry best practice.

The Committee noted that misunderstandings of ESG regulations may have compounded the issue of UCITS being less lendable than they could be. These misunderstandings can arise through the variety of different ESG regulations that exist in Europe, which can make lending restrictive. Some of the gaps in regulation exacerbate this problem, as market participants may not be clear on the extent to which ESG concepts ought to be applied to securities lending collateral.

The Committee noted there had been significant recent movements in global ESG disclosure guidelines for investment products. Members referred to a seminal IOSCO paper on disclosure management. There is still some time needed for the recommendations set out in this paper to be digested by the industry before it is clear what the impact will be.

A challenge faced by the securities lending industry is that participants tend to define ESG differently; however, the securities lending industry is used to dealing with clear rules. The greater guidelines and clarity laid out by the various trade bodies, the better this will be for the industry. Thus, the Committee was supportive of the formation of GASLA (formed in October 2021 and initially comprising 5 securities lending trade associations globally), noting it marks an important step in making clear best practice for the industry. In particular, it might help solve some of the internal conflicts around how to act as a European lender of Asian assets. The more work GASLA can do on this the greater the benefit for both the industry, and for beneficial owners. It is indicative of the common goal towards ESG that has taken hold in securities lending.

The Committee noted that the UN PRI is also one of the key bodies in providing leadership for securities lending in the ESG space. They are both open and receptive, and it is important for the industry to keep a dialogue with them open. That said, some members felt that their current securities lending guidelines are out of date. ISLA are working on a paper to provide interim guidance for the industry on ESG implications for collateral. Beneficial owners will get comfort from lending their assets by looking to such guidance, as they gain assurance the industry is aligned with the desires and understanding of investors.

Item 5 - Diversity and Inclusion on Securities Lending Markets

There was general consensus that hybrid working is being embraced by the industry. The Bank of England, for instance, has moved to a system of expecting everyone to come into the office at least once a week. But hybrid working adoption is still in its infancy and there are no clear answers to all the questions posed by working in this new environment. The Bank is for example, trialling various different ideas, such as team days, where an entire team comes into the office on a given day.

Committee members observed that the City has been getting busier. Mondays and Fridays were the least busy days. The importance of in-person meetings where possible was noted, while being careful to avoid any discrimination and remaining mindful of increasing case numbers in the UK.

Committee members also discussed some of the potential challenges surrounding hybrid working. One area noted of particular importance noted by ‘Women in Securities Finance’, was to be aware of the re-introduction of stigma for people working remotely as more people return to the office. It is important progression, and the way people are viewed should not affected by presence in the office – there needs to be alignment between broad guidelines and policy and practice. Examples of ways to avoid this would be to avoid continuing discussions once meetings are over. It is important also to avoid returning to the office becoming a tick-box exercise, and for seniors to set good examples of hybrid working arrangements.

Some members felt that employees should be left some autonomy over their working habits to avoid losing many of the benefits that have been gained from hybrid patterns, and to avoid enforcing patterns that don’t work for everyone. Crucially, while no one disagreed with the benefits of in person meetings and being in the office (particularly for more junior staff), it is still important to recognise that there is the segment of the population that cannot return to the office (e.g. people with disabilities or long term illnesses and dependants) that continue to need accommodations made for them in the form of hybrid working.

The Committee strongly emphasised it is important for groups like the Securities Lending Committee and ‘Women in Securities Finance’ to provide leadership in this space. This includes being an agitator to employers, and calling out certain behaviours from employers, so as not to lose the benefits to the industry and its workers that hybrid working has brought, particularly in respect of advancing the diversity and inclusion ambitions of the industry.

Item 7 - AOB

No issues were raised in AOB

Attendees

Apologies

Bank of England