Outreach Blog

Wednesday, January 5, 2022


A Hippocratic Oath for Securities Lenders

Author: Ed Blount

First Do No Harm


     If the Securities and Exchange Commission approves the many industry requests for delay of its proposed 10c-1 reporting rule for securities loans, leaders in the Global Association of Securities Lending Associations (GASLA)[1] should move quickly to create a more efficient and lower cost disclosure regime. Congress will not allow the SEC to ignore recent academic charges of rampant cross-border tax evasion and negligent proxy voting by index funds. Collective action is required to craft a disclosure system that improves on the SEC's proposal.


  • First, the best practice statements[2] of GASLA associations should be amended to incorporate a version of the traditional physicians’ pledge of “Do No Harm.”[3]
  • Second, GASLA members, pressed by client demands for ESG compliance and rocked by cross-border tax scandals, should voluntarily elevate their public disclosure standards.
  • Third, the revised T+1 service agreements of GASLA members in the U.S. should provide for diligent adherence to local codes of ethics when operating in any market venue. 
  • Fourth, GASLA members should act in concert to deter global tax fraud by validating the economic substance of new cross-border loans.


     Lack of trust by civil society is a severe competitive disadvantage that cannot be endured long in today’s ESG-sensitive markets. The 2020 Cordoba Declaration[4] of the World Medical Association defines the patient-physician relationship as a privileged bond based on trust. This mirrors the expectations that civil society has for securities finance.

     All securities lenders aspiring to the Do No Harm standard should act in concert to eliminate the criminal temptations that exist in the cross-border markets. Turning a blind eye to theft from national treasuries violates client trust and is not acceptable when seeking to comply with even the most basic environmental, social and governmental (ESG) principles.

     If GASLA members do not take these steps, they will continue to lose clients to fintechs and endure ever increasing compliance burdens. As a clear example, the SEC has called for an industry staffing increase, with an initial burden of more than 500 FTE’s and 200 annual FTE’s for compliance with the rule 10c-1 disclosures.


The “S” in ESG Rules All


     Practitioners sometimes complain that ESG standards are ambiguous, in that there are few consensus principles.  This is analogous to the client relationship in cross-border finance which, like its medical counterpart, should be based on ethical standards that exist above and beyond the civil code. Civil society expects well-paid professionals to comply with statutes and regulations but also meet a primarily moral code of democracy, one that that unambiguously “aims at improving a person’s [financial] health and wellbeing” to Do No Harm.

     For their own good, senior managers in the securities lending community should act to restore trust in markets with disclosure standards and practices that strip thieves of their cover in the cross-border markets. That can be achieved by working together to create a cross-border registry that assigns a visa stamp to legitimate loans and narrows the scan for tax auditors and risk managers at custodians and brokers.


“The relationship has slowly progressed towards the empowerment of the patient.”


     For decades, the “Best Practices” statements of financial and medical professionals have been following a similarly convergent path to client empowerment. Now, the rising focus on ESG represents the latest and highest expression of client demands for the best and fairest service practices. The attention of the regulators has never been higher. The proposed 10c-1 disclosures are evidence that it is time for the community to act before the regulatory reform tide engulfs them.

     There is no better path to client empowerment than for service providers to help securities lenders reclaim the title to their data. GASLA members should use the SEC’s record formats and delayed implementation of the 10c-1 proposal to create registries and data trusts, under the delegated authority of a designated administrator, to meet the ESG compliance aspirations of their clients.

     When applied to cross-border securities lending, the principle of “Do No Harm” can validate the unparalleled social benefits of capital markets as international supply chains for productive investment. The starting point for GASLA members should be to PUT temptation out of reach. Then, every federal economic and regulatory incentive should be awarded to those GASLA members who proactively deter abusive transactions from undermining legitimate capital flows.


[1] “The Global Alliance of Securities Lending Associations (GASLA) was formed in September 2021, and is a collaborative working group of leading global securities lending industry associations.” https://www.islaemea.org/gasla/

[2] “GASLA have been working with a broad range of securities lending market participants to drive best practice, to support integration of corporate governance policies around voting, stewardship, and active ownership.” Ibid.

[3] The modern version of the Hippocratic Oath is contained in the World Medical Association’s 1948 Declaration of Geneva, as amended in October 2017:  https://www.wma.net/policies-post/wma-declaration-of-geneva/

[4]  “The patient-physician relationship is part of a human relationship model that dates back to the origins of medicine. It represents a privileged bond between a patient and a physician based on trust.” WMA Declaration of Cordoba on Patient-Physician Relationship, adopted October 2020 by the 71st WMA General Assembly: https://www.wma.net/policies-post/wma-declaration-of-cordoba-on-patient-physician-relationship/


The CSFME’s Regulatory Outreach Programs

Regulatory reform has become a collaborative process. Where once market supervisors promulgated rules without regard for input from practitioners, today’s reform process has evolved into a dialogue of mutual respect for the opinions of all stakeholders in the capital markets. The process of regulatory outreach has become embodied in virtually every developed markets in the world.

The CSFME has adopted a role of facilitating this collaborative dialogue at all stages of the professional contribution process. Starting with students’ contributions to published commentary letters, through panel presentation and webinars, right up to trade association initiatives, the CSFME provides assistance through education, data compilation, analysis and commentary for some of the most pressing issues in contemporary markets.

DLT and Preferred Securities Financing

We believe the widespread use of encrypted third-party ledgers, blockchains, and smart contracts (i.e., DLT) is inevitable in securities finance, and that those technologies will permit lending agents to offer new revenue opportunities to their clients. Among these, we believe that certain agents will use DLT to help their lenders expand their loan books by opening their lendable portfolios on a preferential basis to the hedge funds in which they've already invested, as well as to other trusted counterparties, a concept we have dubbed, “Preferred Securities Financing.”  

CSFME is openly soliciting participation in a research initiative to assess the potential benefits to securities lenders from the use of DLT and data sourced from new regulatory disclosures. Specifically, our research will focus on how DLT, blockchain, and smart contracts can facilitate Preferred Securities Financing.  Learn More about our DLT Securities Finance Initiative

Research and Analysis of the Effects of Financial Regulatory Reforms

Given the sweeping changes in financial market regulation following the financial crisis, CSFME has turned its focus to questions relating to to how these changes are affecting the risks and economics of bank activities. The purpose of the Center’s research in this area is to foster sound policymaking and effective regulation with minimal adverse and unintended consequences. CSFME studies supervision and regulation of global financial institutions, the effects of reregulation on the global financial industry, optimal roles and methods of regulation in securities markets, corporate governance at financial institutions, and the most effective metrics and methods of data collection for understanding and measuring the effects of regulations on the global financial landscape. 

Lately, in response to a call from the FDIC for research on financial sector policy and regulation, the Center submitted a paper modeling the indirect costs to markets of bank regulatory reform.  The paper critiques regulators’ models for assessing these costs, and provides empirically-based suggestions for a more complete dynamic model of the long-term effect of bank capital reform.  Mindful of the Basel Committee's ongoing reviews of modeling tools, i.e., May 2012 and March 2016, the Center's critique is intended as a constructive addition to the holistic conceptual base of the regulatory reforms.

The Center also continues to provide input on regulatory proposals.

In March of 2016, CSFME submitted a comment letter to the Bank for International Settlement's (BIS) December 2015 consultative document regarding step in risk.  While supporting generally the goals of the Basel Committee to minimize the potential systemic implications resulting from situations where banks may choose to provide financial support during periods of financial stress to entities beyond or in the absence of any contractual obligations, the Center expressed some concerns and offered some suggestions regarding the approach taken by the Consultation. Drawing on practical experience, the Center offered an example from the trade finance sector supporting its belief that the nature of step-in risk may be one example of an acceptable, non-diversifiable exposure, given the potential positives for the economy at large.

In February 2015, CSFME submitted a comment letter in response to the Financial Stability Board’s November 2014 consultative document, Standards and Processes for Global Securities Financing Data Collection and Aggregation. In its letter, the Center identified additional metrics that may be necessary to assess properly the risk of collateral fire sales associated with securities lending transactions.  In particular, CSFME asserted that FSB and sovereign regulators must expand the data initiative beyond position aggregates, to include risk mitigation resources as well as termination activity.

Students Learn to Evaluate and Contribute to the Reform Process

As the level of intensity surrounding the reform process continued to build in 2013, the CSFME began to bring a fresh perspective to the reform process. By working with finance students and the US regulatory agencies, CSFME hoped to challenge the settled views of stakeholder by introducing the views of those whose careers would be shaped by the outcome of the reforms.

In the spring of 2013, a select group of Fordham University economics students met in Washington with officials at the U.S. Treasury, Office of Management and Budget, Federal Reserve Board, and the Securities and Exchange Commission. The CSFME helped arrange the meetings and funded the logistics. By all accounts, the experience was very positive for students and regulators alike.

Buidling upon the success of the 2013 pilot program, in 2014, both Fordham and the CSFME decided to expand the outreach program and formalized the Regulatory Outreach for Student Education program as the ROSE program. Honor students in finance and economics were selected by the deans of four schools within the university: the Graduate School of Business Administration, Fordham College at Lincoln Center, the Gabelli School of Business, and Fordham College at Rose Hill. The students were organized into four teams representing their schools. The CSFME selected a contemporary issue of career significance, the Financial Stability Board’s Consultative Document on G-SIFI designation of non-bank, non-insurer financial institutions. Each team was charged with studying the issues in debate, then presenting their opinions in the manner of a formal comment letter to the FSB. Over four months, the students reviewed earlier opinion pieces, met with practitioners and regulators, and then submitted their opinions. Without influencing their opinions, the CSFME arranged access to research materials and opinion leaders, then reviewed their letters and, as appropriate, recommended submission on university letterhead. In April, 2014, the four teams’ letters were published by the FSB on its website. In recent memory, no university had ever had one letter, much less four, published on a regulatory website. To finalize the 2014 ROSE program, the CSFME arranged for all four teams to present their opinions to the key regulators at the Federal Reserve Board and the SEC in Washington, D.C. The day of meetings ended with regulators’ praise at the degree to which the students had understood the issues and presented their opinions clearly.

One student team even offered suggestions that regulators had not previously considered and praised for their creativity. “We always know what the trade groups will say, but you brought a fresh perspective.” That team, Fordham College at Lincoln Center, was awarded the 2014 ROSE Award for Analytic Excellence. In retrospect. each student completed the program with a credit that will not only endure on their resumes but also contribute to the evolution of the financial markets through the Twenty First Century.

In 2015 and 2016, Fordham formalized the ROSE Program as a for-credit course in their curriculum. The focus of the 2016 ROSE Program was the Bank for International Settlement's December 2015 consultative document proposing a preliminary framework for identifying, assessing and addressing step-in risk potentially embedded in banks' relationships with shadow banking entities.  Five teams of graduate and undergraduate students in economics, finance, accounting, management, and law researched and drafted comment letters on the consultation and submitted their letters to a panel of distinguished industry judges.  After reviewing each excellent submission, the judges then one winning letter to be presented at a visit to the Federal Reserve Bank on April 27, 2016. The winning team's letter was submitted in full to the BIS, along with a summary of the key ideas from the letters from each of the other four teams, and the submission was published on the organization's website with those of the consultation's other commenters.   All five teams of Fordham Scholars visited Washington, DC on April 27, 2016 and met with officials at the Fed, Treasury Department, and FINRA.  

Institutional Securities Lenders respond to Academic Criticisms

In 2006 the Center was created, initially for the purpose of testing academic criticisms of the securities lending markets. With funding and data support from the Risk Management Association, CSFME found “no strong evidence to conclude that securities lending programs have been used to any great extent to manipulate proxy votes or exercise undue influence on Corporate Governance issues.” Our study also found that “broker borrowbacks” had contributed to spikes in lending activity around record date – the same phenomenon that the academics had misinterpreted as evidence of hedge fund manipulation – due to the efforts of brokers to meet recall notices from securities lenders. In effect, the brokers were scrambling to acquire votes for their customers, not building positions to swing corporate elections. The academics had fatally misinterpreted their findings!

Ed Blount of CSFME testified at the SEC’s Roundtable on the results of the research in September, 2009. Then, the CSFME white paper, published in 2010, was submitted to the SEC as an attachment in response to a consultative document on the “Proxy Plumbing” process. As a result of the Center’s contribution to the collaborative process, the misguided call for reform of securities lending began to subside. Once again, securities borrowers were fairly recognized to be honest brokers in the corporate governance arena.

Securities Lenders consider new means to retain their Voting Rights

In a follow-up to the Empty Voting project (“Borrowed Proxy Abuse” as it came to be known), the CSFME responded in 2011 to requests by the participating securities lenders, by turning its attention to ways in which those lenders might be able to retain their corporate governance rights, while still benefiting from the income attributable to their securities loans. After all, as many studies have found, securities lending contributes significantly to the efficiency of market operations. Why should lenders be forced to choose between their loan fees and fiduciary duties to vote their shares, especially if they are contributing to market efficiency?? With independent funding, the CSFME retained attorneys from two prestigious Washington D.C. law firms, Stradley Ronon and Sidley Austin, to investigate the legal underpinnings to market practices which force pensions, mutual funds, insurers and other institutional securities lenders to give up their voting rights when they lend portfolio securities. In practice, margin customers of brokers also lend their securities, yet they usually retain voting rights -- and most of them aren’t even long-term beneficial owners. Both groups of beneficial owners retain dividend rights, so why, institutional investors asked, shouldn’t institutions also keep their voting rights? With the benefit of exhaustive legal research, CSFME filed a petition with the Securities & Exchange Commission to initiate a pilot program to test new market procedures by which recently-introduced efficiencies in market operations might permit lender to retain votes.  Learn more about Paradoxical Erosion of Corporate Governance

In 2013, the SEC approved that pilot program, largely in response to the encouraging recommendations of the International Corporate Governance Association, as well as the California State Teachers Retirement System and the Florida State Board of Administration.

That pilot was initiated in 2014. Simultaneously, the CSFME began to apply the results to new initiatives in Canada and Switzerland, where the pressure to meet fiduciary voting obligations was intensifying.  More about Full Entitlement Voting