Like a bouncing ball, the media initially reported that ESMA guidelines would mandate 100% of securities lending revenues for UCITS funds be returned to investors. The news has circulated far and wide (Canadian Business, anyone?) but it just wasn’t accurate reporting. We noted this on our buy-side blog last week (“Media overplays changes coming to securities lending from ESMA UCITS guidelines“) and now had some comments for the SFM audience.
At the heart of the confusion is what fees asset managers can retain from lending securities and what needs to go back to their funds’ investors. The ESMA report said that “ESMA decided to recommend that all the revenues arising from efficient portfolio management techniques, net of direct and indirect costs and fees should be returned to the UCITS.” This is a call for transparency and sanity, not 100% of revenues returning to investors.
As usual, ISLA got it right on the first try: “ESMA’s guidance on securities lending is designed to create some clear principles that ISLA fully supports: that securities lending programs should be run for the benefit of the UCITS, and that fund managers should not be unduly compensated through the charging of additional fees where there is no explicit and valuable service provided…. In all cases the Guidance clearly requires that fees charged for efficient portfolio management services, such as securities lending, should be disclosed. ISLA regards such disclosure as good market practice and has strongly supported this requirement.”
The people who got it wrong include Reuters and the Financial Times, usually accurate sources. As Finadium is now on the mailing list for many new information releases, we actually saw the speed at which articles on the ESMA guidelines came out and the information the articles contained versus what was in the ESMA document. We don’t know whether reporters didn’t understand the language or misread it, but this was definitely an error in the reporting. An as example, the FT “Fund managers to lose securities lending profits” reported that “European fund managers will have to return all profits made from securities lending transactions to their investors according to new rules announced on Wednesday by the European Securities Markets Authority (Esma).” No, not really.
Today the right information is seeping into the market. The FT reported (“Experts reject fears new rules will push up fund fees“) that “European guidance calling for increased transparency from fund managers may not push up fees on low-cost exchange-traded funds as feared, several expert commentators and fund managers have argued.” We fear though that the damage is done; the reverberations we see suggest that the story has seeped into the public consciousness that European investors will now get 100% of their securities lending revenues. There are calls for US and Canadian regulators to mandate “the same” requirements. Sorry folks, there is still more education work to be done here.
The ESMA report is here.