We admire the work that the International Securities Lending Association (ISLA) does in Europe on the regulatory front – the group appears to understand well the nuances of the European regulatory process and is able to respond carefully to draft EU position papers on matters of concern. This is especially important at this time as EU regulators are keen to fundamentally change some aspects of the securities industry. ISLA’s latest response is to the European Securities and Markets Authority’s proposal on ETFs and UCITS funds, which includes a section on securities lending.
ISLA makes some logical points in favor of rationality in the EU securities lending market as regards UCITS funds:
– Transparency (there’s that word again – we wonder what it means?) should be doled out on a level playing field.
– Collateral for securities lending should make sense as regards correlation and liquidity.
– UCITS should not be limited to lending by a percent of their portfolio.
Some other proposals in the body of the document speak to the existing arrangements of fee splits between agent lenders and management companies (sometimes the same entity), and management companies and fund shareholders. ISLA says that fees should be disclosed (always, we think, and in the US too). Fees may be split between agents, management companies and shareholders; part of how this happens is the competitive pricing of the management company and should not be regulated as 100% to shareholders. This is all pretty logical stuff. If this were a comedy movie from the 1960s, ISLA would be playing the straight man to the EU’s hysterical comedian.
On the other hand, the popular press still seems to have a bone to pick with securities lending. The Financial Times produced a write up of ISLA’s letter that basically said that investment funds don’t want to lose all their revenues from securities lending. We found the article to have a slight negative bias and also to repeat some on-the-surface accurate but still apples-to-oranges comparison of fees between BlackRock and Vanguard. What a shame.
Final scores:
ISLA: 5
ESMA: 2
FT: 1, at best
ISLA’s response letter to ESMA’s white paper is here.
The FT’s questionable write-up of ISLA’s letter is here.