UK sunk my battleship
25 October 2016
The regulatory board is set and the pieces are moving. Now all the industry has to do is play to win in 2017, as the latest conferences revealed
Image: Shutterstock
Over the autumn conference season the spectre of regulation loomed, posing a variety of challenges, from burdensome demands on infrastructure to complicating cross-border transactions.
Even without the impetus of reporting requirements, conference delegates throughout Europe agreed that the back-office鈥檚 post-trade and collateral management elements are in dire need of a dramatic overhaul if they are going to achieve the levels of efficiency now required to compete effectively in the market. This has, in turn, created an opening for vendors to flaunt their wares to a new demographic of market participants that are no longer able to rely on clunky in-house systems.
At the same time, the topic that never failed to rear its head in conference halls across Europe and the UK was Brexit. Whether Brexit means Brexit, breakfast, or Britain is about to break very fast, no-one is quite sure. What is certain is that it will affect everyone eventually, whether they are UK-domiciled or not.
Build bridges not walls
At the 10th Fleming Collateral Management Forum in Amsterdam, panellists discussed how there are too many differences between regional regulations and not enough will from regulators to align them.
The US, EU and Asian markets maintain a number of regulatory inconsistencies across the main governing frameworks for the global securities lending markets, such as the 色花堂Financing Transaction Regulation (SFTR) and Basel III.
The lack of conformity in the interpretations of the Basel Committee on Banking Supervision鈥檚 recommendations has now been compounded into final-form regulations, which makes conducting business internationally more complex.
According to one panellist representing an association, attempts to iron out differences in implementation dates and align legal readings of key terms and phrases in regulation has often been met with significant push-back by regulators that did not wish to miss deadlines.
At the same time, region-specific regulations, such as the European Market Infrastructure Regulation and the US Dodd-Frank Act, which are meant to have equivalency rules in other jurisdictions, are actually riddled with subtle yet significant differences, according to a consultant panellist.
Another regulatory expert offers an an explanation of this phenomenon: 鈥淚t really goes back to the inception of Dodd-Frank and the 鈥榦riginal sin鈥� of forming regulation for global markets in a fragmented way.鈥�
An organised effort to address regulatory fragmentation is widely expected by the industry to be the primary motive behind what will become the Basel IV initiative.
The real impact of the combined weight of the various regulatory burdens was expressed by the International 色花堂Lending Association (ISLA) in its latest market report published shortly after its post-trade event.
ISLA argued that, as it stands, regulation could 鈥減ush institutional lenders away from the securities lending market鈥� and cause a drain on liquidity.
In its fifth market report, ISLA cited the SFTR, the Bank Recovery and Resolution Directive and the Central 色花堂Depository Regulation as the most stringent regulatory frameworks troubling the industry.
It also highlighted the further restrictions on UCITS coming down the pipeline as another strain on market participants.
鈥淭his [participant withdrawal] in turn could lead to a loss of market liquidity and make it harder and more expensive for institutional investors to invest in equity markets and for government institutions to issue and manage existing government bond programmes,鈥� ISLA explained.
鈥淭he increasingly harsh regulatory environment facing many retail funds, notably UCITS, has led to a permanent shift in borrowers behaviour as they look to borrow securities from entities that better match their own regulatory requirements.鈥�
ISLA, which collates its market report data from all three major industry data providers, also noted that despite this troubling forecast, the value of securities on-loan has actually increased by 4 percent over the course of six months up to 31 June to stand at 鈧�1.9 trillion.
Unsurprisingly, the report reconfirmed that mutual funds and pension plans continue to dominate the global lending pool. Together, they again account for 66 percent of the reported 鈧�14 trillion of securities that institutional investors make available for lending.
One man鈥檚 regulatory burden
An indirect consequence of this regulatory upheaval is that demand for outsourced back-end products has never been higher. Delegates in Amsterdam heard that, although the new regulatory initiatives are a boon for vendors, there has also been significant growth in the amount of oversight vendors鈥� clients must now maintain.
鈥淥utsourcing is all about control,鈥� explained one vendor panellist. 鈥淢y job is to hold our clients鈥� hands when the scary regulations rear their heads. A lot of people love the idea of giving all the responsibility and duties of compliance to a third party, but there is now a fiduciary duty not to do so too much.鈥�
鈥淲e must be ready to receive audits in-house from our clients鈥� own auditors if that鈥檚 what they want鈥攁nd some definitely do,鈥� the vendor representative added.
According to a banking representative who also sat on the panel, previous conversations with a potential client revolved around the cost and competence of the solution, but now there are more questions around how a vendor can satisfy a client鈥檚 fiduciary responsibility to its investors.
When it comes to which area of the securities lending market is most in need of rejuvenation, the industry spoke with one voice.
Delegates at multiple conferences heard the same claim, that the post-trade area must throw off the shackles of outdated legacy systems and embrace a modern way of doing business.
A panel at the ISLA Post-Trade Conference in London made up of representatives from some of the largest banking entities in the securities lending market agreed that a post-trade revamp could bring a significant improvement to lending desks鈥� bottom lines.
鈥淪ome of the biggest revenue opportunities I鈥檝e seen this year have come from our joint operations with our back-office teams,鈥� one European banking panellist explained.
When asked what the largest hurdles to achieving these efficiencies were, another panellist cited outdated legacy systems and improper use of data analysis as the most significant challenges facing institutional banks.
At the same time, buy-side firms must come round to the idea of including their front offices in all aspects of their collateral management programmes, conference delegates heard.
A seasoned panel of industry experts at the Collateral Management Forum explained that, as transaction costs caused by new regulations are being passed along to the buy side, those firms need to cut their own costs and become more efficient to mitigate these factors.
鈥淏uy-side firms need to become more efficient and make this [joint management] happen,鈥� an industry consultant said. 鈥淲ithout the front-office calculations along with the post-trade data analysis, you cannot really know what your collateral is costing you.鈥�
Another panellist representing one of the largest banks in the market stated that the collateral programme is every bit as much the business of the bank鈥檚 front office as the back. 鈥淐ollateral management cannot be limited to the back office and they [the buy side] need the sophisticated attention of the front office,鈥� the banking representative said.
When the question of where responsibility for collateral management lies was put to the audience, however, only 30 percent claimed their front office was 鈥榗losely involved鈥� in the function, with a further 32 percent admitting it was only 鈥榣imited involvement鈥�. Twelve percent said their front offices had no involvement at all.
Reacting to the poll, one panellist claimed that, although these figures showed the industry had a long way to go, it was a vast improvement on when the same question was posed during the conference five years ago. Another consultant panellist stated that collaboration between the buy side, and with utility companies, 鈥渨ill become a big part鈥� of the solution going forward.
The Brexit conundrum
Even with the latest court ruling on Prime Minister Theresa May鈥檚 mandate to activate Article 50, the details around how Brexit will ultimately affect the UK businesses鈥� ability to trade within the EU remains a mystery.
A European lawyer explained at ISLA鈥檚 event that a 鈥榟ard鈥� Brexit will leave UK-based securities lending businesses in a regulatory no man鈥檚 land.
Regulatory initiatives such as the SFTR and UCITS have no existing third-party contingencies to speak of, meaning the UK would be entirely detached from their oversight once Brexit is finalised.
The UK government still intends to formally begin exiting the EU in March 2017, meaning the union will lose one of its founding members by the spring of 2019. This creates problems for UK entities looking to engage in the EU lending market, according to speakers.
The exact details of the terms on which the UK will begin the detach itself from the EU are yet to be confirmed but panellists at the conference outlined several reasons why some of the remaining members will seek a deal that clearly puts the UK in a disadvantaged position post-Brexit.
One speaker explained that, due to a number of other member states also acknowledging a high level of public dissatisfaction with the EU, Brexit would have to act as a case study that would go some way to dissuading other states from attempting to leave the single market.
It its subsequent market report, ISLA reassured its members that Brexit, although hugely significant to the wider financial market of both the UK and the EU, does not pose an imminent threat to UK-based market participants.
鈥淚t is important to stress that the so-called Brexit decision does not fundamentally change any of the legal constructs that govern our industry so day to day business continues uninterrupted.鈥�
Answers to the Brexit question, along with the plethora of other major challenges facing the market should become much clearer in 2017, with the final regulatory details expected throughout the next 12 to 18 months.
Even without the impetus of reporting requirements, conference delegates throughout Europe agreed that the back-office鈥檚 post-trade and collateral management elements are in dire need of a dramatic overhaul if they are going to achieve the levels of efficiency now required to compete effectively in the market. This has, in turn, created an opening for vendors to flaunt their wares to a new demographic of market participants that are no longer able to rely on clunky in-house systems.
At the same time, the topic that never failed to rear its head in conference halls across Europe and the UK was Brexit. Whether Brexit means Brexit, breakfast, or Britain is about to break very fast, no-one is quite sure. What is certain is that it will affect everyone eventually, whether they are UK-domiciled or not.
Build bridges not walls
At the 10th Fleming Collateral Management Forum in Amsterdam, panellists discussed how there are too many differences between regional regulations and not enough will from regulators to align them.
The US, EU and Asian markets maintain a number of regulatory inconsistencies across the main governing frameworks for the global securities lending markets, such as the 色花堂Financing Transaction Regulation (SFTR) and Basel III.
The lack of conformity in the interpretations of the Basel Committee on Banking Supervision鈥檚 recommendations has now been compounded into final-form regulations, which makes conducting business internationally more complex.
According to one panellist representing an association, attempts to iron out differences in implementation dates and align legal readings of key terms and phrases in regulation has often been met with significant push-back by regulators that did not wish to miss deadlines.
At the same time, region-specific regulations, such as the European Market Infrastructure Regulation and the US Dodd-Frank Act, which are meant to have equivalency rules in other jurisdictions, are actually riddled with subtle yet significant differences, according to a consultant panellist.
Another regulatory expert offers an an explanation of this phenomenon: 鈥淚t really goes back to the inception of Dodd-Frank and the 鈥榦riginal sin鈥� of forming regulation for global markets in a fragmented way.鈥�
An organised effort to address regulatory fragmentation is widely expected by the industry to be the primary motive behind what will become the Basel IV initiative.
The real impact of the combined weight of the various regulatory burdens was expressed by the International 色花堂Lending Association (ISLA) in its latest market report published shortly after its post-trade event.
ISLA argued that, as it stands, regulation could 鈥減ush institutional lenders away from the securities lending market鈥� and cause a drain on liquidity.
In its fifth market report, ISLA cited the SFTR, the Bank Recovery and Resolution Directive and the Central 色花堂Depository Regulation as the most stringent regulatory frameworks troubling the industry.
It also highlighted the further restrictions on UCITS coming down the pipeline as another strain on market participants.
鈥淭his [participant withdrawal] in turn could lead to a loss of market liquidity and make it harder and more expensive for institutional investors to invest in equity markets and for government institutions to issue and manage existing government bond programmes,鈥� ISLA explained.
鈥淭he increasingly harsh regulatory environment facing many retail funds, notably UCITS, has led to a permanent shift in borrowers behaviour as they look to borrow securities from entities that better match their own regulatory requirements.鈥�
ISLA, which collates its market report data from all three major industry data providers, also noted that despite this troubling forecast, the value of securities on-loan has actually increased by 4 percent over the course of six months up to 31 June to stand at 鈧�1.9 trillion.
Unsurprisingly, the report reconfirmed that mutual funds and pension plans continue to dominate the global lending pool. Together, they again account for 66 percent of the reported 鈧�14 trillion of securities that institutional investors make available for lending.
One man鈥檚 regulatory burden
An indirect consequence of this regulatory upheaval is that demand for outsourced back-end products has never been higher. Delegates in Amsterdam heard that, although the new regulatory initiatives are a boon for vendors, there has also been significant growth in the amount of oversight vendors鈥� clients must now maintain.
鈥淥utsourcing is all about control,鈥� explained one vendor panellist. 鈥淢y job is to hold our clients鈥� hands when the scary regulations rear their heads. A lot of people love the idea of giving all the responsibility and duties of compliance to a third party, but there is now a fiduciary duty not to do so too much.鈥�
鈥淲e must be ready to receive audits in-house from our clients鈥� own auditors if that鈥檚 what they want鈥攁nd some definitely do,鈥� the vendor representative added.
According to a banking representative who also sat on the panel, previous conversations with a potential client revolved around the cost and competence of the solution, but now there are more questions around how a vendor can satisfy a client鈥檚 fiduciary responsibility to its investors.
When it comes to which area of the securities lending market is most in need of rejuvenation, the industry spoke with one voice.
Delegates at multiple conferences heard the same claim, that the post-trade area must throw off the shackles of outdated legacy systems and embrace a modern way of doing business.
A panel at the ISLA Post-Trade Conference in London made up of representatives from some of the largest banking entities in the securities lending market agreed that a post-trade revamp could bring a significant improvement to lending desks鈥� bottom lines.
鈥淪ome of the biggest revenue opportunities I鈥檝e seen this year have come from our joint operations with our back-office teams,鈥� one European banking panellist explained.
When asked what the largest hurdles to achieving these efficiencies were, another panellist cited outdated legacy systems and improper use of data analysis as the most significant challenges facing institutional banks.
At the same time, buy-side firms must come round to the idea of including their front offices in all aspects of their collateral management programmes, conference delegates heard.
A seasoned panel of industry experts at the Collateral Management Forum explained that, as transaction costs caused by new regulations are being passed along to the buy side, those firms need to cut their own costs and become more efficient to mitigate these factors.
鈥淏uy-side firms need to become more efficient and make this [joint management] happen,鈥� an industry consultant said. 鈥淲ithout the front-office calculations along with the post-trade data analysis, you cannot really know what your collateral is costing you.鈥�
Another panellist representing one of the largest banks in the market stated that the collateral programme is every bit as much the business of the bank鈥檚 front office as the back. 鈥淐ollateral management cannot be limited to the back office and they [the buy side] need the sophisticated attention of the front office,鈥� the banking representative said.
When the question of where responsibility for collateral management lies was put to the audience, however, only 30 percent claimed their front office was 鈥榗losely involved鈥� in the function, with a further 32 percent admitting it was only 鈥榣imited involvement鈥�. Twelve percent said their front offices had no involvement at all.
Reacting to the poll, one panellist claimed that, although these figures showed the industry had a long way to go, it was a vast improvement on when the same question was posed during the conference five years ago. Another consultant panellist stated that collaboration between the buy side, and with utility companies, 鈥渨ill become a big part鈥� of the solution going forward.
The Brexit conundrum
Even with the latest court ruling on Prime Minister Theresa May鈥檚 mandate to activate Article 50, the details around how Brexit will ultimately affect the UK businesses鈥� ability to trade within the EU remains a mystery.
A European lawyer explained at ISLA鈥檚 event that a 鈥榟ard鈥� Brexit will leave UK-based securities lending businesses in a regulatory no man鈥檚 land.
Regulatory initiatives such as the SFTR and UCITS have no existing third-party contingencies to speak of, meaning the UK would be entirely detached from their oversight once Brexit is finalised.
The UK government still intends to formally begin exiting the EU in March 2017, meaning the union will lose one of its founding members by the spring of 2019. This creates problems for UK entities looking to engage in the EU lending market, according to speakers.
The exact details of the terms on which the UK will begin the detach itself from the EU are yet to be confirmed but panellists at the conference outlined several reasons why some of the remaining members will seek a deal that clearly puts the UK in a disadvantaged position post-Brexit.
One speaker explained that, due to a number of other member states also acknowledging a high level of public dissatisfaction with the EU, Brexit would have to act as a case study that would go some way to dissuading other states from attempting to leave the single market.
It its subsequent market report, ISLA reassured its members that Brexit, although hugely significant to the wider financial market of both the UK and the EU, does not pose an imminent threat to UK-based market participants.
鈥淚t is important to stress that the so-called Brexit decision does not fundamentally change any of the legal constructs that govern our industry so day to day business continues uninterrupted.鈥�
Answers to the Brexit question, along with the plethora of other major challenges facing the market should become much clearer in 2017, with the final regulatory details expected throughout the next 12 to 18 months.
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