In a blog post, CEO of the International Securities Lending Association (ISLA) discussed the major themes of 2024 and what’s next.
“Each year I write an end of year blog and each year I reflect on the pace of change and my expectation that the upcoming year will bring a sense of stability to the market. This year however, I have no doubt that 2025 will be every bit as feverish as 2024. What will change is that it will be the industry in the driving seat as it continues to work together to identify new growth, new markets and new liquidity.”
In Europe, the idea of regulatory and market convergence in the form of the Capital Markets Union continues to be plagued with political expediency and the Draghi report on EU competitiveness published earlier this year underlined some of the endemic structural challenges that Europe faces as it contemplates how to effectively compete with the other global trade blocs.
Meanwhile, the dust has now settled on the US presidential election results. Although financial regulation did not feature prominently in Trump’s campaign, there is a growing consensus that Trump 2.0 may usher in bolder deregulatory actions than seen during his first term. With the Basel III Endgame stalled, unresolved questions surrounding the implementation of 10c-1a, and potential shifts in SEC leadership and Congressional priorities on the horizon, the direction of travel appears evident even before the President-Elect assumes office.
“For our markets, the critical question is not just what Trump’s policies will entail, but how global markets will respond. Will we witness greater regulatory alignment, or a reversal of the harmonization efforts seen in recent years?,” wrote Dyson.
Outside of the US and Europe, few markets have caused as much of a buzz in 2024 as the Middle East, particularly the Kingdom of Saudi Arabia (KSA), and for good reason.
With ambitious goals to develop a stronger market structure and diversified economy while also being home to one of the fastest growing and most liquid stock exchanges in the world, 2025 is likely to be a pinnacle year for the Kingdom and broader region. Earlier this year, ISLA published the Securities Borrowing & Lending Guide for KSA.
“Through 2025 we plan to publish several more country-specific guides to provide our members with leading market insights to help inform their own engagements with the Middle East but to also provide a common interpretation to form the basis of ISLA’s future regulatory engagement on behalf of its members in the region,” he wrote.
While the Middle East brings plenty of opportunity, 2025 has the potential to offer many different routes to future growth. UCITS funds are poised to play a more prominent role, driving growth and diversification. However, regulatory hurdles, such as the ambiguity surrounding the use of pledge have hindered progress. ISLA has been actively advocating for the allowance of UCITS to accept collateral by way of pledge, increasing the attractiveness of UCITS as a vast liquidity source for borrowing, without reducing the levels of investor protection or introducing additional risk.
2024 has also seen retail aggregators emerge as a key player in the global securities lending market. By pooling small retail holdings into larger, tradeable blocks, they can inject significant liquidity to the market. However, as with any new market, robust risk management, resilient technological innovation, and regulatory compliance are essential.
With technology driving the retail landscape, it is also fundamental to the efficient operation of the ‘traditional’ securities lending space. With the increased use of technology comes the promise of greater efficiency, lower costs and faster development, however, with over-reliance comes increased risk especially when things don’t go to plan.
“As we look back at the events of 2024 while looking ahead to 2025, there is no doubt in my view that whist presenting some short-term challenges, they also afforded the opportunity to look at new and novel ways to think about this space including the advancement of frameworks such as the CDM [Common Domain Model],” he wrote.