ISLA releases securities lending market report

In this latest report, ISLA builds upon previously observed themes, particularly around the role of government bond lending and how collateral is flowing around the system.

From the report:

Through the closer monitoring of collateral profiles, for example, we see how institutions are changing the asset mix they hold on their balance sheet as they respond to requirements of prudential capital regimes such as Basel III. We are also able to anticipate where market liquidity could face challenges.

It is now evident that circa 60% of all securities lending transactions in Europe originate from institutional investors who will fall outside of the transparency requirements created by the Securities Financing Transactions Regulation (SFTR). As the SFTR is implemented, this could raise important questions around market liquidity should these out of scope lenders opt to divert lending supply away from Europe. This could certainly be the case if other global regulatory regimes adopt different and potentially less onerous reporting requirements.

Following the election of Donald Trump in the US, the mood music around regulation appears to be changing in North America. We may see either delays or watering down of the implementation of global initiatives such as the Financial Stability Board’s (FSB) recommendations around the reporting and transparency of Securities Financing Transactions (includes repo, securities lending and margin lending), of which the SFTR is the European Commission’s response to FSB’s proposals. Were a two speed approach in this area to consequently develop, the opportunity for regulatory arbitrage could grow and also negate any global aggregation of SFT data.

Read the full report

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