Minutes of the Securities Lending Committee meeting – September 2023

Minutes

Item 1 – Diversity, Equity & Inclusion

The Committee noted the intentional efforts and initiatives across the industry over the previous 12 months which continues to support a new generation of securities finance professionals. The conversation is now moving towards longer term retention of talent across financial services as there has been a higher rate of attrition among mid-career professionals with caring responsibilities, as they struggle to integrate work and home life. In particular, recent metrics site that for every senior female promotion, two senior females leave the profession. Members noted that senior women in financial services are quick to reach capacity due to the additional pressures of female representation across the business and where the demand for staff presence in the office has clashed with the demands of family life. Members noted that this is particularly noticeable when industry organisations look for female representation and have a finite pool of senior women to approach.

Members noted that the culture within firms and financial services plays a significant role in female attrition. Mentoring and sponsorship has supported female progression however, there remains work to be done to ensure sustainable female contribution. Firms offering flexible working patterns for all parents, which enable caring responsibilities to be shared, are likely to see a higher rate of female progression and retention. Providing additional resources to cover parental leave and continue delivery of objectives is necessary. Overall it was felt that culture will benefit from raising people management as a priority.

Item 2 – Working Group no Settlement Efficiency

The Working Group on Settlement Efficiency was initiated to review root causes of the high level of securities financing fails and to recommend solutions. The Working Group’s findings will contribute to the Money Market Code section on securities lending.

The group has met with infrastructure businesses, fintech firms and industry organisations in order to survey market participants’ perspectives and gain deeper insight to the nuances affecting securities financing settlement procedures. Findings are expected to be reported to the Committee in the new year and will support work on settlement in the T+1 settlement cycle.

Item 3 – Recent Market Trends & Observations

The Committee discussed the recent calm markets following the summer and noted the change in remuneration of reserves in the ECB and Germany. The Federal Reserve paper regarding haircuts for mandatory clearing in treasury markets and associated cost implications, and potential impact on market activity, was discussed. ISLA continues to support members navigate the European tax regime relating to equity markets, through discussions with member states and the ECB.

There has been little year-end term repo trading thus far, with balance sheet remaining available. However, renewed hedge fund positioning in the basis trade has been a noticeable theme. The FICC sponsored repo structure in the US, means that the market can sustain much higher levels of basis trading. However, the FED is planning to introduce mandatory haircuts, which if implemented could halve the level of basis trading. The committee noted that haircuts are still zero on many repo trades, so there is a reasonable expectation that they need to rise.

Item 4 – Recent Themes Recap

Risk Weighted Assets

The Committee noted the state of flux regarding US regulations with uncertainty around timelines. The market is working towards an anticipated July 2025 deadline to begin a graduated implementation of the output floor, with full implementation by 2030. Members expect alignment with other jurisdictions and continue to plan accordingly. The changes to EU regulations on unregulated corporate entities expected in July 2024, will have considerable impact on businesses. Members noted the need to determine a whole-market solution with regulators.

T+1 Settlement

It was noted that securities lending markets can delivery on a T+0 basis with DVP models in the US, so broader investment by market participants in technology solutions is required to gain a higher level of settlement efficiency. Settlement processes need to be aligned across securities financing firms to enable efficient delivery of instructions, collateral and assets. Members noted the dislocation between FOP and DVP settlement, and fund and securities settlement cycles in the UK market. Members expect the European market will take longer to implement T+1 due to different settlement and clearing cycles.

Item 5 – Environmental, Social and Corporate Governance in Securities Lending Markets

Members noted a lack of innovation on ESG products and a concern around reputational risk hampering development, following previous momentum. Members noted difficulty in receiving restricted collateral and financing investment through securities financing transactions. The Committee noted that clarity was required from regulators to support further work, particularly in areas where industry bodies had provided feedback.

Item 6 – AOB

The UK Treasury has published a draft paper on the short selling regime. It was noted that sovereign debt has been removed from the regime and there are no proposed changes to borrowing and lending rules. Public disclosure will move to an aggregated model.

Attendees

Nina Moylett, Chair, M&G

Ina Budh-Raja, Bank of New York Mellon

Devi Aujeet, Barclays

Tim McLeod, Blackrock

Matt Emerson, Citadel

Habib Motani, Clifford Chance

Tanja Hauenstein, Credit Suisse

Jack Skinner, DMO

Alan Barnes, FCA

Johanne Armita, Goldman Sachs

Jamie Anderson, HSBC

Anant Gajar, HSBC

Shikha Kalra, HSBC

Godfried de Vidts, ICMA

Andrew Dyson, ISLA

Harpreet Bains, JP Morgan

Krishan Chada, Morgan Stanley

Tim Smollen, MUFG

Simon Dunderdale, M&G Plc

Matt Emerson, Citadel

Morten Gevoll, Norges Bank IM

Cassie Jones, State Street Global Markets

Apologies

Adam Jacobs-Dean, AIMA

Andy Krangel, Citi

Sunil Daswani, Standard Chartered