Based on the European Securities and Markets Authority’s (ESMA’s) UCITS guidelines, which became effective in February, it was initially feared that asset managers would be required to return all revenues from securities lending to investors. Responding to these and other concerns about its UCITS and ETF guidance, ESMA issued a "frequently asked questions" document
on April 12. These new answers, however, did not answer fully the concerns raised about securities lending, and left serious gaps in how the new guidelines are to be applied.
Question 4a: According to the guidelines, all revenues arising from efficient portfolio management techniques, net of direct and indirect operational costs, should be returned to the UCITS. Does this mean that securities lending agents should not be paid for their services?
Answer 4a: No. The guidelines do not prohibit the deduction from gross revenues arising from efficient portfolio management techniques of fees paid to securities lending agents as a normal compensation for their services in the context of such techniques. However, pursuant to paragraph 35 of the guidelines, the annual report of the UCITS should contain details on the revenues arising from efficient portfolio management techniques for the entire reporting period together with the direct and indirect operational costs and fees incurred.
It seems that under the new guidelines, securities lending agents, which can be the UCITS or ETF's management company, may still earn normal compensation for their securities lending services. ESMA's new guidance confirms that revenue from securities lending belongs to the UCITS or ETF and must be returned, but net of operation costs. What operational costs this covers remains unclear, however. ESMA does not provide any definitions of direct and indirect operational costs in the context of portfolio management techniques like securities lending. This leaves some lending agents in a quandary, and may force them to leave the space. The Securities Lending Times
has reported that Fidelity is in the process of reviewing aspects of its securities lending business, with a particular focus on problems raised for UCITS and ETFs by new regulations.