Minutes of the Securities Lending Committee meeting – September 2021

Minutes

Item 1 - Bank of England Introductory remarks and minutes from last meeting

The Chair confirmed that the minutes of the May 2021 meeting were published on the Bank of England's (BoE) website and had no comments to raise on the minutes from that meeting.

The Chair thanked Mick Chadwick for all his work with the Committee.

The Chair welcomed D&I attendees to the meeting.

Item 2 - Recent market trends and observations

The Chair led a discussion about recent trends and developments in the securities lending market. Committee members discussed that the broad themes from recent meetings had persisted over the last quarter. The lack of specials in the market, and spread compression remained persistent which in turn presented revenue challenges.

The market was characterised as having a lack of shorts, although, in recent weeks, this position had reversed slightly. Overall loan balances were lower than in the previous quarter.

Loan supply flow was also noted as being lower over the summer trading period. The quieter summer months had however presented an opportunity for lenders to analyse their books to identify opportunities for revenue growth.

Agent lenders, meanwhile, had explored whether collateral sets could be expanded in a bid to explore further revenue generating opportunities.

It was noted that there had recently been an increased number of consolidations in the market.

Extracts from recent Securities Financing Transactions Regulation (SFTR) published data was shared with the Committee. It was noted that some of the apparent effects from Brexit were manifesting themselves in the reporting. For example, the data appeared to show a 40% fall in volumes for trades that passed through European trade repositories but some members felt that might be a quirk of the reporting. 85% of all transactions were single-side reported, indicating that the other leg of the transaction would potentially come from an institution outside of Europe. But it was noted that certain European entities are exempt from SFTR reporting including central banks, and there was therefore some uncertainty as to the accuracy of this analysis. In operating securities lending transactions, SFTR reporting data showed that 15% of the market transacted using pledge, with the remainder on traditional title transfer.

The Chair confirmed that the discussion on the reporting, including the impact of single-sided versus dual-sided reporting would be continued at the next meeting.

The discussion from the previous meeting continued on whether, post-Archegos, there had been any further reaction in risk management practices and in competition for Hedge Fund business. The Committee were in agreement that although there had been no further notable developments, members had continued to receive client enquiries.

Item 3 - ISLA Developments - Common Domain Model

ISLA provided an update on the development of the Common Domain Model (CDM) which establishes a single, common, digital representation of trade events and actions across the lifecycle of financial products.

ISLA's 2020 pilot development work has contributed to the core CDM earlier this year. The fundamentals of Securities Lending transactions are now incorporated in the model. But there are still further elements that could be added for example on evergreens, and corporate actions

ISLA have developed a closed library and worked with 50 members to collate different business outcomes, and will release the variants for each clause and the model wording in the next couple of weeks. This aims to speed up the drafting processes, and the next step is to digitise the library.

ISLA have now signed a Memorandum of Understanding with ICMA and ISDA that seeks to make the CDM an open-source collaboration. Talks have been held with the financial open source community in US.

Wider scale adoption of the model is hoped to be attained through promotion at working groups, conferences, by talking to data standards communities, and regulators. Feedback indicates that there is broad support for the initiative across the industry.

Item 4 - Environmental, Social and Corporate Governance (ESG) in Securities Lending Markets

There was broad consensus that ESG and sustainability themes remained an important focus for Committee members.

ISLA updated that they have launched a white paper in conjunction with Allen & Overy on ESG in Securities Lending. The paper identified a five key actions for the industry. ISLA via the ESG Steering Group will lead a number of work-streams on those action points. There remains two key areas of focus:

Firstly, asset owners remain concerned that securities are being borrowed to secure votes according to short-term or non-ESG aligned strategies which may contradict their own ESG objectives. Asset owners sought to ensure that they can exercise their own voting rights in such circumstances.

Secondly, an increasing number of institutional clients have adopted ESG objectives within their investment process and asset managers in Europe are now mandated to incorporate ESG considerations within their securities lending programmes.. But determining how an ESG policy should equally apply to collateral, and whether the way cash reinvested is consistent with ESG investment objectives presents a challenge. ISLA has considered, for example, the applicability of the United National Principles for Responsible Investment to collateral and cash re-investment in order to determine a 'standardised approach for securities lending. Such considerations will be included in ISLA's Best Practice Guide. There remains an open question of whether collateral placed on pledge is treated the same as collateral placed under title transfer.

Members discussed the need to better educate clients (within the ESG context) on: the motivation for lending, the securities that could be lent and which markets they seek to be active in, and the counterparties they seek to transact with.

Some clients remained cautious about the reputational risk impact if ESG considerations are not applied robustly to their portfolios. This was resulting in a rather 'blunt' approach in deciding which securities to lend out in the absence of regulation or standardisation.

Some clients had expressed concerns about the complexity of ESG collateral schedules, a problem that is especially acute if the market needs to move quickly and positions need to be unwound.

Item 5 - Tokenised Collateral

A presentation on tokenised collateral was given. Tokenisation is the digital representation of underlying collateral (equities, fixed income, or cash) that are traded on a blockchain.

From a liquidity perspective tokenisation was suggested to provide five benefits:

1. Instant settlement, which can reduce settlement risk and thereby negates the need for intra-day liquidity
2. Settlement precision, as to-the-minute settlement can allow firms to know exactly when they can get intra-day liquidity thus allowing for more dynamic use in triggering intra-day liquidity needs.
3. Mobilisation of liquid collateral. This offers the ability to tokenise a range of illiquid assets such as loans, which thereby increases the potential pool of assets that firms can use as liquidity.
4. Reduced collateral realignment and reducing operational costs and frictions.
5. Enhanced commercial value. The market is very much in its infancy, but on paper, has the scope to grow rapidly and provide significant revenue earnings and cost saving opportunities.

Significant recent progress in market development was noted.

The development of digital cash is taking longer. Central Bank Digital Currency (CBDC), and stable coin development was thought likely to aid the transition process. Members saw stable coins as being more actively used in the next year or so, and that will in turn lead to their broader adoption of digital cash. .

The Chair agreed to continue the discussion on tokenised collateral, and digital cash at the next meeting.

Item 6 - Diversity and Inclusion on Securities Lending Markets

The Bank of England ('the Bank') provided an update to the Committee following the recent 'Meeting Varied People' event. The Bank continues to ask firms to invite a broad representation of colleagues to Market Intelligence gathering calls and to its external markets committees.

The Bank is keen to hear about any initiatives being run at respective firms either at these meetings or through direct bilateral communication.

The Committee discussed whether over the course of the pandemic there had been any tangible changes in diversity and inclusion across firms. Overall it was felt to be a mixed picture. It was suggested that for many firms on the sell-side there had been little change in flexible working in front offices, and as staff returned to the office, there was an element of 'business as usual' as traders returned to dealing rooms. On the buy-side, there appeared to be some more tangible changes and flexibility in approach, for example by offering employees the chance to work-from-home more often compared to pre-pandemic.

Feedback to Women in Securities Finance from its members broadly agreed with this assessment. There was data that supported the assertion that some trading rooms were returning back to business in much the same way as before the pandemic. It was acknowledged that there work still to be done across the industry. It was noted that a review of the PRA and FCA handbooks revealed the continuing existing use of masculine terms.

Some members reasoned that the working-from-home model would drive talent mobility. It was acknowledged that many firms still took a short-term view to ensure that current business targets were being met rather than seek to develop a pipeline of talent. It was suggested by some members that linking targets on Diversity and Inclusion to compensation could help drive behaviours in the industry. It was felt by some members that there could be a role to play for regulators to help set benchmarks to help incentivise behaviour.

Item 7 - AOB

The Committee was in agreement that there were no unexpected impacts from the risk-free-rate transition on securities lending business.

There was a request to include an agenda item on Central Securities Depositories Regulation (CSDR) at the next meeting given that the regulation is to go live in February 2022.

Attendees

Matthew Chessum	Aberdeen Standard Investments
Adam Jacobs-Dean	AIMA
Ina Budh-Raja	Bank of New York Mellon
Devi Aujeet	Barclays
Tim McLeod	Blackrock
Habib Motani	Clifford Chance
Tanja Hauenstein	Credit Suisse
Jessica Pulay	DMO
Alan Barnes	FCA
Johanne Armita	Goldman Sachs
Joana Barata	Goldman Sachs
Matt McDermott	Goldman Sachs
Godfried de Vidts	ICMA
Andrew Dyson	ISLA
David Shone	ISLA
Farrah Mahmood	ISLA
Simon Dunderdale	M&G Plc
Nina Moylett	M&G Plc (Chair)
Matt Brunette	Norges Bank Investment Management

Apologies

Andy Krangel	Citigroup
Harpreet Baines	JP Morgan
Krishan Chada	Morgan Stanley

Bank of England

Jon Pyzer

Shashi Daboo (Secretary)