An Open Invitation to the DLT SECURITIES FINANCE INITIATIVE
CSFME is inviting banks and their institutional clients to join a match.com-like securities lending cooperative, designed to get ahead of the coming regulatory uptick in finance by creating reports that demonstrate compliance with social agendas. The cooperative will produce a suite of new compliance and risk reports that rely on distributed ledger technologies (DLT) and SFTR data (sourced from the Securities Finance Regulatory Transaction disclosures). These new reports are needed due to proposed new U.S. and E.U. regulations that are pushing minimum compliance specs to levels that cannot be met, experts believe, without the use of DLT's encrypted third-party ledgers, blockchains, and smart contracts.
The reporting cooperative will not change operational flows, but rather enable compliance with ESMA's recommended audit of securities finance data for evidence of tax abuses and the new SEC / DOL focus on mandating that mutual funds and retirement funds justify their ESG strategies. That powerful combination of regulatory forces should make adoption of DLT inevitable on both sides of the trade.
The goals of the cooperative are to enable:
1. Securities lenders to gain market share by directing loans to their most trusted hedge funds and dealer borrowers;
2. Hedge funds and dealers to gain more stable supply, as sourced directly from pools of client securities; and
3. Lending agents to earn significant fees for processing, reporting, and mitigating risks for those loans.
Agents will rely on DLT to help lenders expand their loan books to the hedge funds in which they've already invested and to other trusted borrowers on a preferential basis, through a practice dubbed Preferred Securities Finance (PSF). The DLT/PSF coop extension will enable end-to-end matching of loans to show compliance with both the WHT and ESG requirements.
Experts believe that the success of such breakthroughs as the Walmart/IBM Food Trust and the Maersk/IBM TradeLens programs can be replicated in the supply chains of securities finance, to the benefit of investors, asset managers, and other market participants. Specifically, the Phase I research project will demonstrate how to move DLT, blockchain, and smart contracts from theory to practice, and actually bring these benefits, among others, to market participants.
• If you are a lender, DLT/PSF can create higher demand for your securities at better rebate rates, and thus improve performance. In addition, the end-to-end mapping of loans made possible by new SFTR data coupled with blockchain and DLT technologies make it possible to understand how your borrowers are using your loaned securities, creating invaluable risk management and ESG compliance tool. With this knowledge, you can certify to regulators (particularly those in the EU) that your loans are benign and compliant, and also can boost your ESG and contract compliance efforts.
• If you are a borrower, DLT/PSF has the potential to offer you more stability (i.e, fewer recalls) in your supply chain and an enhanced relationship with your prime broker and investors. The end-to-end mapping of loans provides similar benefits for regulatory and legal compliance with the emerging WHT and ESG reporting standards.
• If you are a lending agent or prime broker, DLT/PSF can add to the menu of services you offer to your lending clients. DLT/PSF would be particularly attractive to clients engaging in, or being forced to comply with ESG strategies. As ESG investing and WHT auditing becomes more prevalent, clients’ RFPs will calibrate service providers to the degree their programs can manage and report compliance. And, with borrower default indemnity no longer affordable to many lenders, DLT/PSF will also provide some additional and valuable counterparty risk management tools.
The experience of CSFME’s principals in securities finance spans the era from the bilateral lending of physical securities certificates to the current practice of synthetic lending by universal banks clearing through central counterparties. CSFME experts have testified on securities finance topics before all three branches of the U.S. federal government, as well as state and local governments.
Cooperative reporting is planned to begin before the next major EU dividend season in the Spring of 2021.
For more information, please use the contact form on this page.