By Fran Garritt and Paul Guinan from the Risk Management Association (RMA)
New regulations are serving to create more durable, sounder financial markets but add new costs and limitations that could constrain capacity in securities financing transactions (SFTs). Additionally, some proposed rules have the effect of not meeting their stated objectives.
Agent lenders and borrowers have strong mutual incentives to develop solutions to address these regulations, including the issues that they generate, such as capacity constraints and technical clarifications. As a result, agent lenders and borrowers are collaborating accordingly as both proposed and final regulations need to be interpreted and addressed from business, legal and operations-and-technology perspectives. The RMA has addressed the abundant regulatory developments by helping to coordinate industry responses on a number of topics, acting as a unified voice for industry progress.
RMA’s Fixed Term Trades Working Group submitted a comment letter at the end of 2017 requesting that the Treasury and IRS address the current US tax uncertainty associated with fixed term securities loans.
RMA is promoting industry discussion on the regulation via the Legal, Tax & Regulatory and Operations & Technology subcommittees. These subcommittees are also liaising with the International Securities Lending Association (ISLA) on the impacts, including to beneficial owners in the US and possible solutions to facilitate implementation.
US Data and Transparency
The RMA continues to monitor the potential for a mandatory regulatory trade reporting regime in the US through periodic conference calls with the Department of Treasury, Office of Financial Research (OFR), and staff members from the FSB and Federal Reserve. No mandatory trade reporting has been introduced at this time.
US Treasury Core Principals
Many of the primary concerns raised by the RMA in our letter were addressed by the Treasury in their June 2017 report, “A Financial System That Creates Economic Opportunities, Banks, and Credit Unions,” including the recommendation that a more risk sensitive approach to credit exposures be adopted for the existing standardized RWA calculation and proposed Single Counterparty Credit Limit (SCCL) calculation. Additionally, the RMA raised concerns about the scope of the proposed rules regarding contractual stays on Qualified Financial Contracts (QFCs), which were reflected in the Federal Reserve’s final rule issued in September 2017.
Equities as Collateral
In this combined effort between RMA and SIFMA, these groups have been working with the SEC to address adding equities as collateral to the Customer Protection Rule, 15C3-3, and debit to the reserve formula for broker dealers. Additionally, RMA and SIFMA submitted supplemental data that illustrated the comparability of equities collateral to other collateral permitted by the SEC’s 2003 Collateral Order. The associations met with the SEC and held subsequent conference calls to discuss.
Latin American Initiative
Following the 2017 RMA Conference on Securities Lending’s panel discussing the future of securities finance in Latin American markets, RMA held a 2018 web seminar and has created a working group to further explore opportunities related to the development of these markets. The common themes the Association has identified through the region are market growth, an increase in foreign involvement, and a willingness to work with regulators and industry groups. Currently, RMA is identifying the key players for each country/market to engage in further discussion on the path forward and working to present in front of the local authorities to introduce and discuss the benefits of securities finance to market efficiency and liquidity.
RMA continues to maintain an active dialogue with other associations, including The Securities Industry Financial Markets Association’s (SIFMA) Securities Lending Division, ISLA, and Pan Asian Securities Lending Association (PASLA). As a professional association with extensive contacts in the industry, RMA has been able to facilitate meetings to discuss various issues with senior level officials of regulatory agencies across the globe. RMA, through its Committee on Securities Lending, Subcommittees, and working groups address multiple areas of the securities finance industry, including:
- Legal, Tax, and Regulatory Development
- Membership and Industry Affiliate Liaison Issues
- Risk Standards, Performance, and Communications
- Operations and Technology
In summary, global regulatory developments along with the progression of international securities finance markets continue to remain at the forefront of the industry’s collective efforts and require our attention, collaboration, and direct engagement. The Risk Management Association will continue to advocate that rules should achieve their stated objectives by highlighting potential unintended consequences on markets and the securities lending industry.
The Risk Management Association (RMA) is a not-for-profit, member-driven professional association serving the financial services industry. Its sole purpose is to advance the use of sound risk management principles in the financial services industry. RMA promotes an enterprise approach to risk management and serves the securities finance industry by promoting the advancement of best practices throughout global markets.