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The Future of the Securities Lending Market: An Agenda for Change

A white paper from ISLA and Linklaters

 

The Future of the Securities Lending Market: An Agenda for change

The securities lending market is at a crossroads. The market is becoming increasingly complex, and regulation increasingly onerous. As a result, processes and systems that have until now served the market well are proving increasingly cost- and time-intensive, given the degree of fragmentation and reliance on manual processes.

Regulatory and technological catalysts provide the market with an opportunity to reconsider how loans are managed and how processes can be adapted and streamlined. The ultimate vision is a market that is automated, streamlined and interconnected (across events and market participants) in a way which is scalable and future-proof, so it can be adapted as the environment (whether legal, regulatory or practical) changes over time.

This white paper, authored by ISLA and Linklaters, explores how, in its ideal form, the lifespan of a securities loan would work.

The future of the securities lending market

Explore our view of the ideal form for the lifespan of a securities loan. Each key part of the lifecycle is explored in detail in our white paper.

Pre-contractual

A new counterparty would easily provide relevant information for KYC/AML/onboarding purposes through data held centrally and kept up-to-date. It would be automatically captured and stored electronically so that it can be easily transferred into individual institutions’ systems and used for various onboarding needs.

Contractual (master agreement / loan)

Negotiation and execution of legal documentation would take place on an electronic platform with an ability to easily apply or disapply standardised and industry-recognised drafting, as well as to check the documentation against applicable legal requirements. Booking of a loan would take place automatically based upon agreed market practice/conventions.

Again, relevant information would be automatically captured and stored by the electronic platform so that it can be easily transferred into individual institutions’ systems and used for a variety of internal and regulatory needs, such as credit assessments.

Allocation

Where a bulk or pooled lending structure is used, allocation and communication of allocation to the borrower would take place swiftly and automatically after execution of the loan. Again, relevant information would automatically be captured and stored electronically so that it can be easily transferred into individual institutions’ systems and used for onwards internal consumption.

Commencement

The delivery of the loaned securities and, potentially, collateral at the outset of a loan can again be a more manual process than is necessary. It would be possible to develop a single, common digital representation of this event (as well as other life cycle events), which would feed off of data electronically captured through more integrated, standardised processes.

Performance / Enforcement

The data captured in the initial stages (and kept up-to-date throughout the life of the loan) would feed automatically into middle- and back-office systems set up to manage termination and ensure consistency of approach across the parties to the loan. This event would also be represented by a common digital representation.

Termination

The data captured in the initial stages (and kept up-to-date throughout the life of the loan) would feed automatically into middle- and back-office systems set up to manage termination and ensure consistency of approach across the parties to the loan. This event would also be represented by a common digital representation.

Automation technologies like smart contracts were the inevitable way forward for the derivatives industry to drastically control or cut costs and achieve operational efficiencies. There were several questions raised even as recent as last year about these innovations. Most prominent were the teething issues given their early stage of development, whether smart contracts could actually replace legal ones and even the legal definitions of smart contracts. Clearly the markets moved further ahead, and we are proud to have worked with ISLA in playing a foundational role. Regulatory frameworks and standards top the agenda now, something that we at Linklaters are well placed to lead and help industry bodies articulate for market participants.

Deepak Sitlani, Partner

We are delighted to have worked with ISLA on this white paper. There has been considerable focus in the financial markets on the possible use (and benefits of) contract negotiation technology, smart contracts and common domain models. This agenda for change builds on this to provide an innovative vision of the future operation of the securities lending market. 

Richard Hay, UK Head of Fintech

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The Future of the Securities Lending Market: An Agenda for Change




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ISLA future of securities lending report cover
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