ISLA tells lenders how to avoid “unsustainable levels” of cost and risk
The International Securities Lending Association (ISLA) has released a whitepaper warning the securities lending industry that on its “current trajectory, costs and risks will continue to increase – potentially to unsustainable levels”.
ISLA’s CEO Andy Dyson says “the alternative is to recognise and engage with these changing conditions by standardising, automating and streamlining processes”. By doing this, the industry will become “future-proof” and will ensure the smooth running of the global financial markets.
The paper, which is called ‘The Future of the Securities Lending Market | An Agenda for Change’ and was drafted with international law firm Linklaters, analyses the securities lending market, looking at operational flows and systems against the backdrop of regulatory prerequisites.
Over the next two to five years, ISLA believes firms should put a number of things in place to secure this “future-proof” vision, laying out an eight-step guide of a stock loan transaction as a model process.
The process begins with ‘pre-contractual’ Know Your Customer (KYC) question preparation for onboarding, ensuring the response complies with the Securities Financing Transactions Regulation (SFTR) reporting requirements where applicable. The paper also highlights how basic information should be stored, mentioning standard settlement instructions (SSIs).
The second stage is the contractual agreement, preparing drafting for changes made to the global master securities lending agreement (GMSLA). An electronic negotiation and execution platform should be used to host to GMSLA, and “logic” from ISLA-commissioned legal opinions should be integrated into an automated process flow.
Stage three is the contractual loan, where a common domain model (CDM) should be made to digitally represent key details of transactions. The SFTR report generation and loan data validation should be automated, and common standards should be adopted to reduce complexity.
The paper mentions that the International Swaps and Derivatives Association (ISDA) has created a CDM which offers a single, common digital representation of derivatives trade events. To avoid duplicative and inconsistent systems, ISLA is proposing a similar solution for the securities financing markets to aid technology adoption and has already selected a group of market participants to drive its development.
Stage four, ‘allocation’, should see automatic systems developed to provide feedback to borrowers on allocation instantaneously, and step five is ‘commencement’, where another CDM is made and functions such as pre-matching can be used.
Stage six, which analyses performance and life cycles, will see the automatic generation of SFTR reports and a list of best practices.
Stage seven, ‘enforcement’, should see another CDM and the final stage eight, ‘termination’, will see the same again to represent the termination of a loan and like stage one, will consider how to store or reconcile SSIs.