Minutes of the Securities Lending Committee meeting – May 2022

Minutes

Item 1 – Introductory remarks

The Chair confirmed that the minutes of the November 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 additional attendees (Shikha Kalra, Debashree Tripathy, Tina Baker, and Charles Jomar Alino) to the meeting.

Item 2 – recent market trends and observations

A challenging macro environment drove equity markets in Q1, stemming from: the Russia/Ukraine conflict, hawkish monetary policy communications, rate hikes and the prospect of Quantitative Tightening. Clients had rotated into value and away from growth stocks. Equity capital market activity had slowed as liquidity conditions deteriorated but are expected to pick up in Q3.

Increased market volatility was supporting revenues in some markets but this in part was dependent on risk appetite and contagion risk. Cash reinvestment returns increased, following interest rate rises in US. Capital requirements and Risk Weighted Assets (RWAs) continued to be a focus for the industry.

On-loan balances picked up in Q1 partly driven by increased market volatility. The securities lending market continued to face a lack of specials, although there was still some interest in travel and airline stocks. Corporate bond demand was strong, as was demand for Exchange Traded Products (ETPs). Hedge Funds preferred to express market views through ETPs rather than through sectoral shorts.

Hedge fund performance was mixed with some strategies experiencing double-digit losses, although most quant funds have fared better.

The Central Securities Depositary Regulation (CSDR) continues to draw many resources. The industry is trying to move to increased automation and leverage use of technology but this will take time. There continues to be a number of issues and numerous trade breaks.

Settlement rates have improved marginally in the UK and Europe but continue to lag the US - although it benefits from a less fragmented market place. The Committee agreed that inefficiencies in settlement were not uniform across product classes, with settlement rates of corporate bonds significantly lower than fixed income or equities. Equities settlement benefited from increased automation. The liquidity issues in corporate bonds arise because of structural inefficiencies in the settlement process rather than CSDR. These issues are coming to light due to the high volume of trades going through the system. The Committee felt that CSDR fines were not high enough to justify their processing costs.

The Committee discussed Special Purpose Acquisition Companies (SPACs) as an asset class. There was consensus that the UK and European SPACs markets had not taken off in the same way as that in the US. And that the ‘shelf life’ of the SPACs asset class could be getting shorter based off limited interest this year compared to 2021.

Item 3 – Voting

The committee discussed a well-publicised instance where one counterparty had borrowed shares for voting purposes at an AGM.

The Bank stated that they were disappointed that this transaction had taken place in clear breach of Chapter 4, section 6.3 of the UK Money Markets Code, and would be discussed further at the Code Sub-Committee. The Bank re-iterated that borrowing specifically to vote was against the widely agreed best practice in the market. ISLA supported the views of the Bank.

The Committee agreed that trading protocols in this example fell outside of best practice. Given the link between the Code and the Senior Managers Regime, Committee members felt that this case also raised important questions about the governance surrounding this trade.

The Committee agreed that the wording in the UK Money Market Code was clear on the topic of borrowing shares for voting at an AGM. It was agreed that the Code should be upheld all times to give institutional investors confidence that their shares and lending actions would not be contorted by the actions of borrowers. It was agreed that issues of this nature could impact the confidence of Institutional Investors and limit the supply of stock to the market.

The Committee discussed the US treatment of loaned shares over AGMs. The SEC have placed the onus on lenders to define the purpose of the lending transactions and to call out instances where their shares that are out on loan but not recalled over the AGM dates.

The Committee discussed whether there are opportunities for consolidated trade surveillance based of widely available data. In this instance, only STFR reporting would reveal how the position is building up.

Item 4 - Agent lender disclosures

ISLA have now established a working group that have met three times to reinstate and develop standards around agent lender disclosure.

Agent lender disclosure provides an industry standard for agent lenders and broker-dealers to exchange underlying principal level detail information related to transactions executed under securities lending agreements. The initiative established a standard process and infrastructure among industry participants. 

The key challenge in this initiative will be securing the agreement of the lending and borrowing community on ‘Know-Your-Customer’ data standards.

Item 5 - Tokenised collateral

This item will now be discussed at the next meeting.

Item 6 – ESG

Most firms did not lend Russian or Ukraine securities and collateral over the last few months, and they were also excluded from collateral sets.

Some members discussed that work was initially required to define what constitutes a Russian security; one example shared was that of a non-Russia security with Russian beneficial owner. In the end, a cautious approach was adopted and the security was not lent.

The Committee agreed that there was some reliance on ETFs and tri-party agents to continue to monitor the underlying assets, but felt that tri-parties were well practised in managing sanctions.

Most lenders sought to recall their Russian assets. But there were different messages from Clearstream and Euroclear with regards to the timing and opening of Bridge Settlements. Some members felt that their instructions where not clear on when the sanctions where being applied and to which securities.

Item 7 - D&I

The London network of Women in Securities Finance (WISF) continues to grow in membership. As the industry returns to in-person events, the group this year has intentionally focussed on networking opportunities.

Earlier this year it completed full launch of a new networking initiative called ‘Grow Your Network’ (GYN) this enables women to establish connections with other people across the securities finance industry, helping to advance them professionally, as well as giving them the opportunity to support others to grow. ‘Grow Your Network’ creates a series of one-to-one connections by pairing WISF members with individuals where opportunities to cross paths may not have existed, for short icebreaker introductions. Pairings take into consideration backgrounds, experience, and different grades, to ensure diverse matching. The WISF London Network aims to run at least two rounds of GYN this year. Its first in-person networking event will take place at the ISLA Annual Conference in Vienna on June 6-8^th, which will be open to all delegates, inclusive of all genders, and present opportunity for members to connect across the growing membership.

Item 8 - AOB

The Committee will seek to discuss at a future meeting implementation of the output floor under Basel 4. Based on the proposals some Beneficial Owners will not be rated. There was interest from some Committee members to discuss how to incorporate this in the future regime.

Attendees

Apologies

Bank of England