ISLA says ISDA seclending agreement does not address agency lending or pledge

Reflections of the CEO, 18 March 2022

Looking back at the recent work published by ISDA, we note that they do not address the agency structure through which a high proportion of the securities lending transactions in the market are currently effected, and also do not apply to the pledge structure which the Pledge GMSLA seeks to document. Similarly, although the new provisions potentially offer netting from a credit perspective, and whilst it will naturally take a little time for the opinions to be in place to support this credit benefit, the regulatory capital treatment of SFTs and derivatives are distinct in a number of ways: the products are valued differently from an accounting perspective, and importantly have different treatments from a liquidity and regulatory capital perspective and entirely separate regulatory requirements (for example, uncleared derivatives are subject to a complex margin regime). Bringing these two quite different and distinct worlds together in a single document may help from a broad credit perspective but it does raise complexities, particularly with regard to regulatory capital, which it will be essential for market participants to analyse and validate in their own context, especially at a time when a range of other demands are being placed on legal departments in a rapidly evolving market.

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