The securities lending regulatory environment continues to evolve, as multiple jurisdictions and regulators propose and implement new regulations. This report provides a summary of the key regulations that are under review and outlines potential implications of the regulations for lenders, their agents and the wider securities lending industry. J.P. Morgan plays an active role in the ongoing developments to consult and educate regulators about the securities lending process. Should you wish to discuss any of the items in the report, please contact your Securities Lending Relationship Manager.
| Regulation Title |
Effective Date |
Securities Lending Implications |
Potential Impact |
| EU Short Selling Regulations |
Nov 1, 2012 |
New short selling regulations expected to have limited impact on securities lending business directly. Sale of shares on loan not considered a short sale. Possible broader market implications due to proposed limits on market making exemption and requirement for public disclosure of short positions. |
Low |
| ESMA ETFs and UCITS Guidelines |
Q1, 2013 |
ESMA has published guidelines covering various aspects of securities lending for UCIT funds. Although not effective, they are final. The key points in the guidelines are:
- Aggregation of collateral thresholds and limits across both OTC derivative and securities lending transactions;
- Collateral provided under 'title transfer' to be held in the name of the depositary;
- Specific diversification and concentration limits to apply to all types of collateral – cash and non-cash – together with a prohibition on rehypothecation;
- Requirement for funds to disclose fee splits in prospectus and annual reports, together with undertaking 'stress testing' if more than 30% of NAV is on loan.
|
High |
| Shadow Banking –
SL/Repo Workstream |
2014
(earliest) |
Following the EC green paper on Shadow Banking, the Financial Stability Board ("FSB") created several work-streams to review the issue. One work-stream is specifically looking at securities lending and repo activity, and is looking at issues such as transparency/disclosure, minimum regulatory haircuts and rehypothecation of assets. The working group is expected to publish its interim report in November 2012 following the G20 Finance Ministers meeting.
|
High |
| Basel III / Capital Requirements Directive |
2013
(Q1 earliest) |
Basel III guidelines are still to be formalized, however the EU has issued the Capital Requirements Directive and Regulation (CRD4) which sets out how much of a bank's own capital must be set aside to cover their potential risks and to protect depositors. Other potential outcomes of the Basel III guidelines may include higher risk weighted assets for indemnified transactions, potentially increasing the cost of indemnification for agent lenders.
|
Medium |
| EU Financial Transaction Tax |
Jan 1, 2014
(earliest) |
Eleven EU member states have now indicated support for a EU wide FTT – and the proposal is now subject to 'enhanced cooperation' and the European Commission is preparing its next draft proposal. It is expected to be published early in 2013. Notwithstanding this, individual markets are moving forward with their own FTT – France has implemented, with a securities lending exemption, Italy and Portugal are in the process of drafting legislation.
|
High |
| UCITS V / VI |
Late 2013 / 2014 |
UCITS V is expected during 2013 and focuses mainly on the interaction between the depositary and the custodian. UCITS VI – which is still in consultation and expected early in 2014 – is part of the Commission's work on the Shadow Banking agenda and will address securities lending and repo.
|
TBD |
| Dodd-Frank
Various sections |
2013 / 2014 |
Consultations underway on a number of areas, including the setting of limits for counter-party exposure, rules around orderly liquidation of assets on default, increased transparency for both lender and borrower and restrictions on a bank's ability to undertake proprietary trading (Volker Rule).
|
Medium |
