How does CSDR impact securities lending?
The primary impact of CSDR to securities lending is the introduction of cash penalties and mandatory buy-ins to transactions that fail beyond intended (contractual) settlement dates (ISD).
How can Lenders avoid penalties that may result from participation in securities lending?
In order to help avoid penalties that may be imposed as a result of selling securities that are on loan, Lenders will need to provide sale instructions on trade date before the local market close of trading so that agent lenders are able to recall the loaned securities that same day. This will align the settlement date of the sale transaction with the due date for any loan recalls, and permit penalties associated with a borrower’s late return of the securities to be attributed to the borrower. Additionally, Lenders may be able to participate in auto-partial settlement services offered by their custodians. This will help enable timely settlement of any positions held with their custodians and minimize the potential for penalties.
How is BBH as agent lender working with custodians in preparation for CSDR?
BBH’s global securities lending team is actively working with its clients’ custodians in an effort to implement processes and procedures designed to identify and assign penalties to the party responsible for the fail. Where BBH is both the custodian and securities lending agent, BBH is working closely with the custody project teams to implement CSDR in a coordinated manner.
How is BBH as agent lender engaging with the broader industry in preparation for CSDR?
BBH is working with industry associations, including various CSDR Working Groups of the International Securities Lending Association (ISLA), to gain clarity in respect of ambiguous provisions in CSDR, to develop form amendments to industry securities loan agreements to minimize documentation negotiation and to formulate best practices for securities settlements. BBH is also working directly with borrowers and custodians to strengthen operational practices around securities lending. The development of best practices, such as reconciliation of settlement instructions, transaction pre-settlement matching and standardized client sale instructions deadlines, are expected to result in a more efficient securities lending marketplace, as well as compliance with CSDR.
What effect will the regulation have on securities lending market liquidity?
The potential impact that CSDR will have on securities lending market liquidity is uncertain. In the short term, it is expected that CSDR could have a negative effect on liquidity as market participants become familiar with the regime and take measures to improve their operational processes and technology in an effort to avoid penalties. This impact may be exacerbated for certain asset types, such as corporate debt, that typically exhibit lower trading liquidity. Over time and as CSDR becomes embedded into the European equity and fixed income markets, we would expect the impact of CSDR to be positive as settlement efficiency improves.
How does the introduction of mandatory buy-in provisions under CSDR affect securities lending?
There remains some ambiguity as to whether a loan transaction with a term of less than 30 days may be exempt from the buy-in provisions of CSDR. ISLA, along with other industry trade associations, continue to engage with European Securities and Markets Authority (ESMA) to clarify this aspect of the regulation. Loans with terms exceeding 30 days that fail for specified periods under CSDR (e.g.4 business days for liquid securities) will be subject to mandatory buy-in. Separately, lenders’ sale transactions that fail for a defined time period beyond the contractual settlement date will be subject to mandatory buy-in.
What impacts will CSDR have on securities lending agency agreements?
Legal agreements will need to be amended to reflect changes in program requirements, most notably the timeframe for sell notifications and the application of penalties incurred under CSDR.