IS YOUR SFTR SOLUTION MISSING A PIECE OF THE PUZZLE? - Securities Lending Times
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The primary source of global securities finance news and analysis Issue 238 15 October 2019
The burning issue of ESG
Uncleared margin rules extension update | Beyond Meat: Did you miss out? | Winds of change
IS YOUR SFTR SOLUTION
MISSING A PIECE OF THE PUZZLE?
Lead Story
Hazeltree acquires ENSO Financial Analytics
Treasury management services provider and data specialists will be integrated with foundation for potential further integration and
Hazeltree has acquired ENSO Financial Hazeltree’s team. partnerships in the future,” he added.
Analytics, a portfolio analytics services
provider for hedge funds and prime brokers, Data analytics provider IHS Markit is also The specific financial terms of the transaction
previously owned by CME Group. a minority stakeholder in the transaction were not disclosed. Sameer Shalaby, president
alongside existing investors. and CEO of Hazeltree, said: “The acquisition
ENSO’s suite of data-driven tools aims to will result in a truly unique integrated solution
enhance risk and operational transparency Pierre Khemdoudi, global co-head equities with extensive scale and talent, to support more
and improve transactional efficiency, data and analytics at IHS Markit, said that than 200 important clients, who can now benefit
thereby allowing multi-prime hedge funds the data analytics provider was drawn to from the best solutions and services available.”
and asset managers to optimise structural investing in the deal because the platforms
and variable costs. and data solutions from Hazeltree and Paul Busby, global head of ENSO, added that
ENSO are highly complementary to its own he expects to the deal to create significant
It captures data on more than $1 trillion in services and network of buy-side and sell- synergies for their global client base.
hedge fund assets under advisory. side clients.
He added: “Together, our teams will continue
Hazeltree said that ENSO will become an “Our investment is a way to help align our to deliver industry-leading technology to help
integral part of its product suite, and its prime solutions to serve the evolving needs of drive continued innovation of our portfolio
brokerage, asset management, technology our customers while also establishing a finance, treasury, and data solutions.”
www.securitieslendingtimes.com 3
Inside SLT
The burning issue of ESG Singing the same song
As the world battles with forest fires, floods and BCBS-IOSCO recommends a one-year extension
hurricanes the securities lending industry looks on the final implementation phase of uncleared
at how it can adapt to the new ESG environment initial margin rules but it’s not that simple
page 18 page 22
Publisher: Justin Lawson
justinlawson@securitieslendingtimes.com
+44 (0) 208 075 0929
Editor: Drew Nicol Beyond Meat: Did you miss out Top five takeaways
Drewnicol@securitieslendingtimes.com Christopher Sappo of Tidal Markets discusses one The major talking points from the recent IMN
+44 (0) 208 075 0928 of the year’s hottest stocks and how his volatility European Beneficial Owners’ Conference
indicator dataset tracked revenue opportunities covering technology, collateral and revenue
Reporter: Maddie Saghir page 26 page 30
maddiesaghir@blackknightmedialtd.com
+44 (0) 208 075 0925
Contributor: Becky Bellamy
Creative Director: Steven Lafferty
Sales Support: Sophie Lam
sophielam@securitieslendingtimes.com
+44 (0) 208 075 0934
Office Manager: Chelsea Bowles Winds of change Industry Appointments
+44 (0) 208 075 0930 David Lewis, senior director at FIS, looks at The latest securities finance comings and
how to do more with less in an ever-evolving goings at Citi, State Street, EquiLend, S3
Published by Black Knight Media Ltd securities finance market Partners and more
Copyright © 2019 All rights reserved page 33 page 36
Your Specialists in Securities Finance
securitiesfinance@comyno.com
4 Securities Lending Times
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News Round-Up
BNY Mellon to add ETFs to agency to accept the funds, the report noted. However, the bank now believes that there
lending collateral list are several market forces that might increase
Although the report acknowledged that the use the potential for ETF collateral use as
BNY Mellon is set to add exchange-traded of ETFs as collateral for securities financing institutions become more comfortable with
funds (ETFs) to its collateral list by the end transactions is on the rise, “convincing how ETF baskets are built and dismantled.
of the year in response to client demands hundreds of clients to add ETFs to their As well as this, collateral flexibility is
for greater flexibility when collateralising collateral schedules will take time”. becoming more important.
securities lending transactions.
The bank plans to leverage its new RULE tool, The report noted that if ETFs are mobilised
In a recent report for institutional customers which can help clients with changes to their as collateral then it is more likely funds’
in the US and Asia Pacific, Simon Tomlinson, existing collateral schedules to include ETFs, liquidity will increase, thereby reducing
global head of agency lending trading at to help speed up the process. market friction.
BNY Mellon, said the process of adding ETF
collateral lists to the agency lending business According to BNY Mellon, the adoption of Additionally, for those jurisdictions and
is already underway, with a view to accepting ETFs as collateral has also been slowed by credit arrangements where cash collateral
it this fall. a lack of nuance in the regulatory oversight may be restricted, ETFs could be easier to
of ETFs. move and manage than other assets, BNY
According to the report, the decision comes Mellon noted.
after the bank began to receive “questions Katy Burne, the report’s author and BNY
from securities borrowers who want to know Mellon’s content and communications The report comes a month after Goldman
when ETF collateral will be accepted for its strategist, described how one current sticking Sachs Asset Management selected BNY
own agent lending business”. point is that regulators that determine what Mellon to provide asset services for its newly-
collateral can be pledged against derivatives launched European UCITS ETFs.
The report also reviews the results of the currently treat Goldman Sachs Access
bank’s survey which asked, among other Treasury (GBIL), an ETF that tracks an index BNY Mellon’s global head of business solutions
things, if its buy and sell side clients would be comprised of US Treasury securities with for asset servicing, James Slater, remarked
open to growing their currently very low levels less than one year remaining in maturity, no that the world is better piped to move equities
of utilisation of ETFs as collateral as a way of differently than an ETF containing Russell than money market funds.
increasing market liquidity. 2,000 stocks.
He commented: “The need to collateralise
The survey of 20 collateral provider clients “When traders pledge $100 of collateral, the transactions is increasing and in some cases
by BNY Mellon Markets found that, by and regulators guide the receivers of that collateral regulations restrict the use of cash.”
large, firms use a negligible amounts ETF how to discount its value in case one side goes
collateral today. belly up,” she explained. Robert Rushe, head of ETF services for Europe,
the Middle East and Africa at BNY Mellon,
Many see their usage growing, however, “With the typical equity-like haircut for ETF noted: “Our appointment bears testament to
especially if liquidity and circulation of the collateral, the requirement today can be north the quality of our ETF-specific technology, our
funds increases or they can find buysiders of 15 percent,” Burne added. scale and our team of ETFs experts.”
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News Round-Up
New UK fintech enters the securities In a statement on the launch, Hudson said that Under the hood
finance market the platform gives financial institutions more
ownership and control of trading operations, while The Hudson platform is built on an advanced
Industry newcomer Hudson Fintech has the software provides the tools and capabilities to system architecture, known as an entity-
unveiled a new securities finance front-office allow customers to quickly adapt to changes in component-system (ECS), which was first
technology platform for sell- and buy-side the regulatory landscape, such as the Securities developed by the online gaming industry
institutions, based on a core technology that is Financing Transactions Regulation. to allow for regular software patches to
unique to the financial markets. be completed with minimal disruption
Hudson was co-founded in March by Michael to players.
Hudson Fintech’s company mission Walliss, who acts as CEO, Troy Peterson, who
statement states its aim is to revolutionise serves as product technical lead, and Dietmar As such, Hudson’s new ECS technology
processes and tackle the “stagnant financial Nowatschek, who is the product owner. platform is designed to be implemented
software market”. quickly, in parallel with existing systems, with
Walliss brings experience running technology little regression testing.
According to Hudson Fintech its software start-ups, while Peterson specialises as a lead
captures and displays trade and market developer for trading systems focused on ECS architecture works with a data model
data, provides position blotters and real- repo, prime brokerage and fixed income. where all objects become individual entities to
time analytics, as well as support end-to- which arbitrary data can be added or removed
end workflow processes. Nowatschek has more than 22 years of at runtime, Hudson explained in the statement.
experience in the global banking sector on
It also promises to improve efficiency and risk both the vendor and the client-side and has Business logic is implemented in the form
management, while lowering the processing focused on analysis and development in front- of unique behaviours that operate on
costs of trades. and middle-office areas. combinations of attached data components.
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8 Securities Lending Times
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News Round-Up
This new style of data model aims to Why launch now? data control and reporting, leading to many
resolve legacy issues, where traditional financial institutions reviewing their outdated
‘hierarchical’ systems are interdependent A spokesperson for Hudson confirmed that legacy systems, typically using multiple
on other components of the system, the platform is now live but does not currently technology bolt-ons, which limit the flow and
Hudson added. have any clients on board, although several efficiency of trading operations.
sell-side institutions are conducting tests with
Hudson promises that, with fewer Hudson’s software. As the financial markets continue to
interdependencies, its platform can be flexible evolve, many of the larger sell- and buy-
in the event of a regulatory or technological The spokesperson added that the impetus behind side institutions are moving away from all-
change to the business, as well as faster to the new platform was demand from banks for a encompassing technology solutions that are
develop, and ultimately less expensive. more modular and light-touch technology solution difficult to install, Hudson said.
that would solve the new demands of today’s
The fintech added that this is achieved securities finance market environment, including The fintech added that specialist firms are
by extensively reusing existing code post-crisis regulatory frameworks. able to offer easy to implement technology
with continuous automated testing, modules that address specific issues without
meaning that less time is spent on manual As a result, Hudson was established to resolve impacting an entire technology stack.
regression testing. financial institutions’ new requirements
for increased regulatory reporting and Rupert Bull, CEO of The Disruption House,
As a result, Hudson aims to significantly transparency, improved risk management a banking technology consultant that is
reduce the time taken to upgrade systems and processes, and balance sheet constraints. currently reviewing Hudson, said: “As many
to cut typical licence fees by up to 50 percent, existing technology platforms reach their end
which it said reflects institutions’ needs to In its launch statement, Hudson outlined that of life, we see a demand for a new technology
reduce costs and increase efficiency. regulators around the world demand increased player in repo trading.”
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www.assetservicingtimes.comNews Round-Up
“I’m a firm believer the regulator Despite this fast-approaching cliff edge, SFTR
doesn’t give a stuff about millions of is apparently not the biggest concern the
data fields,” says ISLA panellist industry faces today.
The purpose of EU regulations due to come When asked in a separate poll what regulatory
into force in 2020 is less about gaining challenges kept them awake at night the most,
access to vast quantities of securities finance only 20 percent of delegates cited the release
transaction data and more about driving the date of SFTR level III clarifications.
In partnership with industry’s transparency modernisation, says
ISLA conference panellists. A further 11 percent pointed to the new data
requirements, including legal entity identifiers
Speaking on a panel focused on the Securities and UTIs, while just 3 percent said actual
Financing Transactions Regulation (SFTR) transaction reporting.
at the International Securities Lending
Association’s (ISLA) Post Trade event in The poll further revealed that delegates’
London, a panellist explained: “I’m a firm biggest worry was the Central Securities
believer that the [EU] regulator doesn’t give a Depositories Regulation’s (CSDR) mandatory
stuff about having millions of data fields.” buy-ins and penalties (34 percent), along
with related booking practices, i.e. corporate
“That’s not the point; the point is supporting actions and booking timing (31 percent).
people to become transparent.”
Don’t get left behind Meanwhile, another speaker said that SFTR
Comparing the challenges posed by SFTR and
CSDR, a panellist said: “I think it [CSDR] is a
would bring efficiency, transparency and slightly different beast, it is all about prevention,
synergy to operational procedures, such as and CSDR is about how much money do you
with reconciliation. want to throw at it to make those problems go
away but at the same time it is not something
“Transparency will help us identify where we you can work on in isolation.”
The joint IHS Markit and can focus our interests to improve processes
and trading as well as create opportunities CSDR’s settlement discipline rules, which include
Pirum solution has:
around data,” the speaker added. the mandatory buy-ins and settlement fails
penalties, is due to come into effect in Q3 2020.
45+ Clients signed up to
Elsewhere, a third panellist said that SFTR will
the solution
also bring sales opportunities. Nomura has selected IHS Markit’s
SFTR and MiFID coverage Collateral Manager
“We talk about auto-returns based on the
All SFTs covered unique trade identifier (UTI) and benefits Nomura has changed collateral management
A full end-to-end solution there and we use it as a stick to encourage provider selecting IHS Markit’s collateral solution.
borrowers,” they explained.
A fully ringfenced IHS Markit has said in a research note on the
data model “From a commercial angle from an agent new mandate that it can reduce Nomura Asset
lender perspective, it’s another service to offer Management’s operational costs and optimise
clients; another piece in our creative toolbox efficiency with its Collateral Manager solution.
that an agent lender can offer, so there is a
www.pirum.com benefit from a sales perspective as well.” Its solution manages over-the-counter (OTC)
collateral and the trade lifecycle with a
In a later panel, delegates were asked whether they “comprehensive, end-to-end solution,” said
could be ready for the April 2020 implementation IHS Markit.
date for SFTR if the level III regulatory details
For more information contact
were only released in December. Additionally, IHS Markit said its solution
connect@pirum.com or call
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Of the 66 people that responded, 62 percent with visibility and control over the collateral
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12 Securities Lending Times
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For informational purposes only. Securities
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Street Global Markets, the marketing name
and a registered trademark of State Street
Corporation, used for its financial markets
business and that of its affiliates. Products and
services may not be available in all jurisdictions.
©2019 State Street Corporation.
statestreet.com/securitiesfinance
2725655.1.1.GBLNews Round-Up
Eurex launches exchange-traded
ESG options
The derivatives exchange Eurex has doubled
down on its commitment to socially-
responsible finance by launching adding its
first exchange-traded environmental social
and governance (ESG) options on a European
benchmark to its product range.
ESG is an umbrella term for investments that
seek to achieve positive financial returns
while also contributing to improving society
and the environment.
The launch of Eurex’s new options, which are
based on the new STOXX 600 Europe ESG-X
Index, is scheduled for 21 October.
Eurex noted in a statement that the options
will further complement its STOXX Select
products with futures and options that capture
the performance of European companies with
high dividend payments, low volatility and a
relatively high ESG score.
In February, Eurex claimed to be the first
exchange to introduce an ESG product- suite of
three futures based on European benchmarks.
Broadridge acquires Shadow Financial Systems
In a statement on the launch, Eurex said the
Broadridge Financial Solutions has acquired Solutions for Broadridge, said: “We look three futures on the highly-liquid European
Shadow Financial Systems to build on its forward to bringing real benefits to a new STOXX benchmarks covering ESG exclusions
current post-trade processing capabilities. set of market participants as well as new (low carbon and climate impact) support
capabilities to our existing client base.” market participants to manage sustainability-
The acquisition adds a solution for driven challenges.
exchanges, inter-dealer brokers and Don Marino, president of Shadow Financial
proprietary trading firms as well as Systems, said: “We are excited to join Seven months after their launch, STOXX
capabilities across exchange-traded industry leader Broadridge and to better Europe 600 ESG-X Index Futures (FSEG),
derivatives and cryptocurrency. serve our clients’ evolving needs while which Eurex says are by far the most popular
adding the scale, deep domain expertise contracts, have reached over 362,000 traded
Michael Alexander, co-head of North and technology resources that Broadridge contracts with 55 percent of the flow coming
American Wealth and Capital Markets can provide.” from end clients and asset owners.
During the peak of the most recent roll period,
In its research note, IHS Markit said it was able to team from its former outsource provider to open interest reached 85,000 contracts worth
secure Nomura as a user of its platform in part surge exponentially. €1.2 billion notional value, according to Eurex.
because of the heightened regulatory demand
under the Uncleared Margin Rules (UMR), which Commenting on the switch, a spokesperson “Options are the next logical step to extend our
is currently being rolled out in phases, and for Nomura said: “IHS Markit’s solution fits ESG offering on European benchmarks,” said
scrutiny over collateral agreements. the collateral management need that Nomura Eurex executive board member Michael Peters.
cannot deliver in-house alone. We look forward
IHS Markit explained that, as a result, the to continuing to meeting regulatory and market “As market feedback on our sustainable
volume of disputes escalated to the Nomura requirements in partnership with IHS Markit.” derivatives is very positive, we will continuously
14 Securities Lending TimesNews Round-Up
expand our product range closely aligned to
the needs of our clients.”
Andrew Fisher, managing director at Goldman
Sachs, added: “With the market becoming
increasingly focused on sustainable investing,
we are excited by this new initiative from
Eurex and look forward to bringing these new
products to our clients.
RMA forms new fintech group
The Risk Management Association (RMA)
has launched a new Financial Technology and
Automation Committee to guide the financial
service industry’s engagement with and
adoption of new technologies while acting as
an advocate for best practices.
The committee will be co-chaired by Charles
Post, managing counsel and director and
head of legal data management and advisory
at BNY Mellon and Nickolas Delikaris, global
head of trading and algorithmic strategies at
State Street.
In its online mission statement, the
committee stated its aim is to reduce risk
and facilitate financial markets through the
understanding, leveraging and implementation
of technologies that assist lending, trading,
collateral management, funding, clearance
and settlement.
According to the RMA, the committee will
accomplish this goal through the creation
of a forum where members can learn
State Street launches managed peer-to-peer
to understand these technologies, their securities finance platform
application, and risks, and formulate and
drive standards to lower the barrier of entry State Street has today launched its “Over the last decade, we have worked
for members. first managed peer-to-peer securities hard to manage balance sheet constraints
finance platform. across banks and broker/dealers
Committee agenda topics include distributed participating in securities lending,” said
ledger technology/blockchain, advanced The bank currently hosts five lenders and Martin Tell, State Street’s global head of
algorithms, such as artificial intelligence and will soon have a second borrower. securities finance.
machine learning, as well as robotics and new
platforms microstructure connectivity. In a statement on the launch, the bank “State Street has created a number of
said that the new product facilitates innovative solutions to support our clients,
New co-chair Delikaris said that the RMA direct lending transactions by leveraging expanding our program to add new markets
will be revealing further details about the its agency lending and enhanced custody and collateral types and diversifying
committee and looking for new participants programmes to offer customers on either methods for borrowers to post noncash
at this year’s RMA Securities Finance and side of the transaction the benefits of collateral by pledging securities instead of
Collateral Management Conference. each programme. a title transfer.”
www.securitieslendingtimes.com 15Malik’s Memo
Stress in the stress test
On 26 September 2019 Andrea Enria, chair of the European Central Bank’s balance sheet view’ would give way to a more realistic dynamic
(ECB) supervisory board, outlined his proposals to amend the nature of the view; and by increasing the transparency by linking the stress test to
annual EU-wide banking stress test (the future of stress testing–realism, supervisory capital requirements.
relevance and resources). This stress test has been subject to mounting
criticism concerning its accuracy and hence Enria seeks to make the test The two views would be the most decisive aspect of the proposal.
more realistic, relevant and with fewer resources required. The problem with relying solely on the banks’ bottom-up figure are,
according to an EP briefing paper, that “banks use their own models to
Methodology is key calculate the effects of pre-defined macro-financial scenarios and to
generate the stress test projections (in the EU, a so-called ‘base-line’
The test results are only as good as the realism of the scenarios scenario and ‘stress scenario’ are used)”. In using these models, banks
against which they are tested. For 2020, the EBA explains: “[S]cenarios, use internal methodologies to translate macro-prudential parameters
methodology, minimum quality assurance guidance, templates and into risk parameters. For example, for credit risk: in particular the
template guidance will be agreed by the European Banking Authority’s probabilities-of-default (PDs), and the losses-given default (LGDs). I
(EBA) board of supervisors. The macroeconomic adverse scenario and wrote about these in my last memo.
any risk type specific shocks linked to the scenario will be developed
by the European Systemic Risk Board (ESRB) and the ECB in close Enria’s approach would call for the ECB to conduct parallel calculations
cooperation with competent authorities and the EBA.” and then present the two results–the banks’ and the ECB’s–side by
side, thereby allowing the public to reach their own conclusion.
Criticism of existing stress test
As regards the static balance sheet, this assumption is a key
In 2011, the EBA was criticised for being overly lenient in its criteria, component of the stress test. It controls (holds constant) the balance
not factoring in a Greek sovereign debt default, thereby passing Dexia, sheet total volume, maturity and product mix (no policy change) over
only for it to subsequently collapse. the stress test horizon. It does not allow the bank to factor in expected
reactions to scenarios. This assumption reduces complexity as the
The EBA focused on Dexia’s 10.3 percent core tier-one capital ratio, expense of realism. Enria suggests a switch to a dynamic balance
placing it well clear of the 6.3 percent threshold for a pass. That sheet response with it left to the bank to justify any changes.
Dexia put out a press release on 15 July headlined “2011 EU-wide
stress test results: no need for Dexia to raise additional capital,” left Finally, linking regulatory capital to the stress test. As Enria stated:
the EBA distinctly embarrassed. Since 2014, the ESRB has taken over “While we are very transparent on the results, we remain quite opaque
developing the scenarios for the stress test. on how they translate into capital add-ons.”
In an academic paper commissioned by the European Parliament (EP), Bringing transparency to opaque models by having an adjacent
Thomas Breuer, outlines three criticisms of the test: regulator view and bank view is a good idea. It will diminish the
• “The restriction of attention to one adverse scenario might foster temptation for banks to ‘cook the books’ by manipulating models since
an illusion of safety” large unexplained discrepancies with the regulator’s calculations will
• The stress test neglects the macroprudential view on systemic lead to a loss of investor confidence. This discussion ties in with Basel
risks. A static balance sheet view based on a fixed scenario fails III reforms that limit the use of internal modelling.
to factor in second round effects (banks’ reactions)
• Banks are allowed, indeed encouraged, to use internal
models which might lead to an inadvertent (or deliberate)
misrepresentation of risk
Regarding the third point, there is empirical evidence to support
Enria’s notion that internal modelling “provides banks with substantial
leeway to materially underestimate their vulnerability to adverse
circumstances, to ‘game’ the exercise, in other words”.
Proposed solution
Seb Malik
Enria proposes to radically change the stress test after 2020 by: Head of financial law
splitting the test into a ‘bank view’ and a ‘supervisory view’; the ‘static Market FinReg
16 Securities Lending TimesBEYOND
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www.cib.natixis.comESG Update
The burning issue of ESG
As the world battles with climate change-induced forest fires, floods,
hurricanes and drought, that is causing wide-spread social unrest around
the world, the securities lending industry looks at how it can do its part to
adapt to the new ESG environment
have sprung up in the US and across Europe against perceived
Maddie Saghir reports
political corruption, social injustice, and environmentally
This year so far has seen the Amazon rainforest afflicted by irresponsible business practices.
untameable fires, while global temperatures continue to rise and
ocean ecosystems are being terminated. Elsewhere, the refugee One of the most prominent mass protests occurred earlier this year
crisis in the Middle East following the collapse of the terrorist in London when thousands of protesters took to the streets under
group ISIS in Syria continues to worsen, and grassroots protests the banner of a new environmental activist group called Extinction
18 Securities Lending TimesESG Update
Rebellion to shut down large swathes of the city in a bid to force the The pull of the sell side
then Prime Minister Theresa May to declare a “climate emergency”.
In its mission to affect a real change in the climate debate, Extinction
More recently, teenage climate change activist Greta Thunberg Rebellion has found an unlikely ally in several of the largest pension
gave an impassioned speech at the United Nations’ Climate Action funds and asset managers around the world.
Summit, saying: “For more than 30 years, the science has been
crystal clear. How dare you continue to look away and come here Industry experts have indicated that the drive primarily stems from
saying that you’re doing enough when the politics and solutions are the sell side and that pension funds, in particular, are pushing for ESG
still nowhere in sight.” investing to present a socially responsible face to their investors—and
they might be onto something.
“People are suffering. People are dying. Entire ecosystems are
collapsing. We are at the beginning of a mass extinction, and all you “The latest research reinforces popular belief that millennials value
can talk about is money and fairy tales of eternal economic growth. ethical investing more than the previous generation,” explains
How dare you!” Merrison. “The age of wealth distribution is imminent. Millennial
investors are more and more discerning, thus increasing the likelihood
Without doubt, 2019 is the year that environment and social issues that demand for ethically focused strategies will continue to swell.”
fully captured the world’s attention to such a degree that it has trickled
down into niche areas of the financial markets, including the world of One such example of the knock-on effect of this social shift was
securities finance. offered when the Amazon rainforest fires in Brazil and Bolivia first
began to dominate media headlines. In response to the crisis, the
In fact, while Thunberg was berating world leaders in New York, California Public Employees’ Retirement System, one of the largest
securities finance market participants were meeting at IMN Beneficial pension funds in the US with $16.2 trillion in assets, became one
Owners’ Securities Finance and Collateral Management Conference of 230 global investors to sign an open letter warning hundreds of
in London, for a series of panel debates that repeatedly highlighted unnamed companies to either meet their commodities supply-chain
the growing trend of environmental, social and governance (ESG), deforestation commitments or risk economic consequences.
also known as ‘sustainable investing’, in the lending market.
Merrison highlights that, as well as becoming more vocally activist,
Talking to Securities Lending Times earlier this year, Andrew Dyson, pension funds are also putting their money where their mouth is. He
CEO of the International Securities Lending Association, described says that in the UK alone, capital allocated to ESG funds now exceeds
ESG as an umbrella term for investments that seek positive returns £1.2 trillion, with the majority held within pension funds.
and long-term impact on society, environment and the performance
of the business. Roy Zimmerhansl, practice lead at Pierpoint Financial Consulting,
which works with beneficial owners on their lending programmes,
“Sustainable finance includes a strong green finance component reinforces this point, explaining that pension schemes are
that aims to support economic growth, while reducing pressures on increasingly focused on ESG and transparency for members is
the environment, addressing greenhouse gas emissions, tackling essential for those plans.
pollution, minimising waste and improving efficiency in the use of
natural resources,” Dyson explains. “Retail funds, including exchange-traded funds, mutual funds and
UCITS use the ESG tag as a way to capture inward investment in this
“In light of the growing political and social focus on issues associated trendy and timely area,” he says.
with climate change more broadly, investors are increasingly looking
to align their investment strategies with these greener credentials,” Zimmerhansl says that he sees ESG being an increasingly important
he added. issue for institutional investors as part of their governance process
and portfolio construction. He explains that inevitably this is having an
However, despite the virtuous overtones presented by many impact on the securities lending market and the market intermediaries
entities the inevitability of ESG integration in investment analysis, will be required to respond.
for both securities lending and borrowing, is a case of practicality
over philanthropy, says Harry Merrison, investment manager, vice “Our discussions with beneficial owners focus on the full lifecycle of
president at Kingswood Group, a wealth management business. activity,” he explains. “Obviously, agents can only lend securities in
client portfolios, so the front-end composition is the responsibility
So what is driving this greener and more ethical way of doing of the portfolio managers. However, clients also own the collateral
business? Is it a latent moral awakening by the financial they receive from borrowers and so in our view, collateral needs
community or a shrewd investment move to capture the latest to also satisfy the lender’s ESG guidelines. There is also ever-
social trend? increasing scrutiny of actual voting practices by asset managers
www.securitieslendingtimes.com 19ESG Update
and this will also impact the business as we anticipate more active On the practical reality of the more complex collateral profile that ESG
voting in future.” represents, Pierpoint’s Zimmerhansl says: “From a securities lending
perspective, we expect to see more operational impact in terms of
Speaking at the IMN conference, Matthew Chessum, investment customised collateral profiles, more comprehensive governance and
manager at Aberdeen Standard Investments, said: “ESG is embedded oversight and increased voting. More moving parts are a potential risk,
across all of the investment processes that we [Aberdeen Standard but the industry infrastructure is more than capable of dealing with
Investments] run.” these rising demands.”
“The main driver behind ESG investing is to increase corporate Other forces for change
standards which is becoming more important. Clients are very
interested in understanding how our focus of ESG is embedded in Additionally, Zimmerhansl notes that he has been involved in
our investment management process. The momentum behind this discussions with hedge funds that use ESG filters as triggers for
practice is definitely picking up and it is only going to become more potential short positions as there is some evidence that poor corporate
important as time goes on,” Chessum notes. ESG characteristics may lead to share price underperformance. The
issue that they face at times is a lack of supply for mid-cap companies
Dispelling the myths and tackling the issues that are short candidates, he adds.
While there is an increasing demand for ESG investing options, Moreover, regulators are also applying pressure on firms to
some industry experts say that it is not on every investor’s consider ESG risk and the carbon impact of investments.
agenda and more can be done to enhance engagement. One
of the main reasons for behind some investor’s reservations is A series of governing rulesets, such as the United Nations Principles
the belief that ESG investment processes can reduce a fund’s for Responsible Investments (UNPRI), have been formed in the past
performance, especially when it comes to securities lending. decade to offer financial institutions guidance and a framework
The argument against ESG follows the well-trodden path that with which to support their evolution to a more responsible way
the equity as the collateral debate has taken in recent years. of doing business. Signatories of the UNPRI, for examples, are
In essence, in the context of the buyers’ market that lenders committed to incorporate ESG considerations in their investment
operate in means, they cannot afford to make themselves any decision making.
less attractive to borrowers by presenting potential suitors with
a laundry list of collateral that goes against its ESG policy. “Regulatory changes are strongly contributing to the shift
towards a low-carbon economy and the reorientation of private
In tackling some of these issues, Merrison notes that while investors capital towards a more sustainable world,” says Sergi Castellà,
increasingly expect ESG factors to be integrated into investment managing director, head of asset liability management, treasury
processes, he sees reduced performance as often being cited as a and funding at CaixaBank, which is a signatory of the UNPRI,
reason for investing elsewhere. According to Merrison, this is simply “At the European level, for instance, the publication of the
not a valid argument and in the past five years, ethical indices have new EU taxonomy provides a shared classification system to
outperformed their non-ethical counterparts. identify green assets that should be increasingly used by the
investor community.”
He adds: “Another measure of success is non-monetary. Investors
can map securities to the UN Sustainable Development Goals Castellà also cites the Paris Agreement as a driving force
(SDG) to determine how their investment has a positive impact. behind a great number of global economic stakeholders
Investor capital can be an important mechanism for change if including sovereigns, corporate and institutional investors
responsibly deployed.” taking a stand on how they can contribute to climate
change mitigation.
The relationship between ESG strategies and risk is also frequently
questioned, but Merrison outlines that evidence suggests and “The challenge is now to move beyond consciousness and towards
performance demonstrates that companies which integrate ESG concrete actions. Again, CaixaBank‘s SDGs Framework is not
factors into their corporate fabric are better long term custodians for only a response to increasing investor demand but also aimed at
investor capital. reinforcing awareness around the importance of ESG investing
options,” he says.
“The logic is irrefutable and many investors recognise that long-term
stable and sustainable investment returns depend on well-governed Looking to the future, we can expect environmental and social issues
social and environmental systems,” he argues. “Ultimately investing to remain in the spotlight and likely grow further in prominence on
in companies which apply ESG factors offers greater downside the world stage and in finance; and the securities lending industry will
protection and yields better long-term risk-adjusted returns.” have to play its part. SLT
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Singing the same song
BCBS-IOSCO has recommended a one-year extension on the final
implementation phase of uncleared initial margin rules but several
regulators are still yet to agree, and they all need to say yes
However, while many in the industry are celebrating the much-needed
Maddie Saghir reports
reprieve, others are warning in-scope market participants not to take
their foot off the pedal for its preparation efforts, as for many, the
Earlier this year, the smallest firms affected by the Uncleared Margin delay is still not a done thing.
Rules (UMR) were offered a life raft when the Basel Committee on
Banking Supervision and the International Organization of Securities Shaun Murray, managing partner of Margin Reform, says: “BCBS IOSCO
Commissions (BCBS-IOSCO) recommended a one-year extension on has extended the time available for the industry, which effectively
the final implementation phase of the initial margin (IM) requirements splits the problem into more manageable chunks of delivery. Following
for non-centrally cleared derivatives. advocacy, BCBS-IOSCO would feel like they have given the industry the
time for the smaller firms to assiduously prepare rather than shoe-
This extends the deadline to 1 September 2021 for phase six firms, horning everyone through the 2020 window.”
while the deadline for phase five firms remains at 1 September 2020,
thereby offering those that were struggling to prepare more time to He predicts: “The extended timeframe makes things easier for the
juggle UMR alongside myriad other demands on their resources. industry, which is why I expect the regulators will see that and support
22 Securities Lending TimesInitial Margin
it. I will be surprised if a regulator comes out against anything that international forum for the governments and central bank governors
BCBS-IOSCO have proposed.” from 19 countries and the EU, responded to the global financial
crisis of 2008-2009 by agreeing to a financial regulatory reform
And indeed, a significant number of the regulators have verbally agenda covering over-the-counter derivatives markets. This included
indicated or provided a written statement saying they support it recommendations for the implementation of margin requirements for
allowing them extra time but it is still important that the remaining non-centrally cleared derivatives.
regulators are all on board.
Since then, the International Swaps Derivatives Association (ISDA)
At time of writing, the US, the EU, Hong Kong, Singapore, South Korea and Securities Industry Financial Market Association have observed
and Australia have agreed to the BCBS-IOSCO extension. Meanwhile, that, regulators around the world have implemented IM requirements
Canada, South Africa, Japan, Mexico and Brazil are still considering for non-centrally cleared derivatives generally in accordance with the
the proposal. Other global regulators are yet to publically respond. final framework, but with some critical differences in certain instances
Although the general reaction by regulators to the deadline extension (See figure one).
has been positive, all the regulators must confirm their approval in
order to avoid market disruption. These rules are commonly referred to as UMR, and margin collected
and posted under UMR is referred to as ‘regulatory margin’.
A problem could arise if, for example, there are two firms conducting
a transaction and one is from a jurisdiction that hasn’t agreed to UMR began to be phased-in on 1 September 2016 for the largest
the extension, that firm still has to be prepared to operate under the market participants and broader implementation of variation margin
terms of the sixth phase of the margin rules. requirements occurred in March 2017. IM requirements continue to be
phased-in annually, bar the new extension.
What are the initial margin requirements?
As the market’s struggles to meet the deadlines became apparent,
The IM requirements for non-centrally cleared derivatives seeks to BCBS-IOSCO issued a statement on July 2019 that outlined its
establish international standards for non-centrally cleared derivatives. recommendation to a one-year extension on the final implementation
Plans started back in 2009 at the G20 Pittsburgh Summit, when the phase (see figure two). BCBS-IOSCO say that the extended timeline
Figure two
Source: BNP Paribas
www.securitieslendingtimes.com 23Initial Margin
is set to support the smooth and orderly implementation of the IM Meanwhile, in terms of the instruments concerned, BNP Paribas
requirements. say that the scope of non-cleared derivative instruments that are
subject to the collection of initial margin is generally consistent
At this point, covered entities with an aggregate average notional across the main jurisdictions in Europe, Asia Pacific and the US.
amount (AANA) of non-centrally cleared derivatives greater than €8
billion will be subject to the requirements. According to the BCBS- Physically settled forex forwards and swaps are excluded across
IOSCO, this is consistent and harmonised across their member all jurisdictions. However, some jurisdictions may have specific
jurisdictions and will also help avoid market fragmentation that exemptions, either on a permanent basis (e.g. equity options and
could otherwise ensue. forwards are out of scope in the US) or on a temporary basis (e.g.
equity options are exempted in the EU only until 4 January 2020), BNP
All instruments (including physically settled forex forward and forex Paribas outline.
swap transactions) count for the purpose of calculating the AANA, even
if they eventually benefit from an exemption of initial margin exchange. In terms of how prepared companies are for IM, Murray says that
despite the extended deadline, he hasn’t heard of anyone taking their
BNP Paribas explained that given the steep increase in the number foot off the gas.
of institutions in scope of the September 2020 deadline, in July
2019 BCBS/IOSCO published a revised policy framework stating “I haven’t seen a spike in client interest but I also haven’t seen a
that the threshold applicable in 2020 would be raised from €8 billion slowdown in client interest,” he explains. “I think there are a number of
to €50 billion and that the €8 billion threshold would be postponed clients out there who have been sat waiting for this to come out who
to September 2021. This statement will be transposed in every are now going to have to gear up to get going because they realise
jurisdiction in the near future. they are still phase five.” SLT
Figure one
Source: BNP Paribas
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