All - Center for the Study of Financial Market Evolution (CSFME)

Reddit Trading and Resilience in U.S. Equity Finance Part 1

by Ed Blount | Thursday, March 11, 2021 | All, Cross-Post, Formal Regulatory Remedies

The trading suspensions set by online brokers in late January 2021 reminded many industry veterans of the systemic circuit breakers that were first deployed during the Black Monday crash of October 1987. In both instances, a loose band of derivatives traders was prevented by the capital rules of the equity clearing and settlement system from continuing to crush exposed short sellers and risk a systemwide collapse. Then and now, changes to the infrastructure were front of mind for regulators when the chaos subsided.

Managing Cash for Changing Flows and Structures

by Ed Blount | Friday, February 19, 2021 | All, Traditions

Since 1980, the cash-based securities lending program has evolved to become the prevalent form of collateral management model in the United States. By 2005, U.S.-domiciled insurers, pension funds, mutual funds and corporate treasurers had securities valued at more than $1.25 trillion on loan. This evolution has not come without difficulties. In the 1990s, securities lenders found that a rising interest rate environment suddenly depressed the value of their cash collateral investments, in some cases to the point of loss when lenders were unexpectedly required to return cash deposits to borrowers. A few lenders sustained losses that exceeded the income they had earned over the course of several years, although in several cases agent lenders absorbed the damages in order to protect their franchises.

Moving ESG Beyond Policy into Practice

by David Schwartz J.D. CPA | Friday, February 19, 2021 | All, Commentary

Accountability in voting is in the news, and nowhere more so than on Wall Street. Through their U.S. credit policy association and its Asian counterpart, Bankers have responded to suspicion among critics that problems abound in the murkiness of the proxy voting practices of asset managers for large pensions, mutual funds, and other institutional investors. With the launch of the “Global Framework for ESG and Securities Lending (GFESL),” the partnership by the two industry associations aims to provide a shared decision-making framework for managing ESG considerations in securities lending.

Bankers: We’re Losing Control of the Narrative on Securities Finance

by Ed Blount | Thursday, February 18, 2021 | All

Our February 1st blog, “An Existential Moment for Securities Finance,” was followed three days later by a meeting of the Securities Finance Committee of the Bank of England. According to the meeting minutes, published yesterday, bankers registered “concerns” about negative headlines for securities lending

A Twenty-Year Journey to Transparency

by David Schwartz J.D. CPA | Tuesday, January 19, 2021 | All, Commentary, Cross-Post, Disclosure Regimes

Securities lending has proven the most challenging aspect of shadow banking for regulators to bring under a regulatory rubric. One of the most vexing aspects for regulators has to be how to make securities lenders’ decision processes about whether to recall lent securities to vote proxies more transparent to investors and the regulators themselves.

An Existential Moment for Securities Finance

by Ed Blount | Tuesday, January 19, 2021 | All, Commentary, Cross-Post

Feb 1, 2021: The social controversy over Gamestop’s (GME) battle of wills — r/wallstreetbets v ‘The Shorts’ — may well harden the scrutiny of regulators and litigators toward the US$2.4 trillion global equity finance ecosystem that supports hedge fund strategies. This is a pivotal moment, not only for GME and The Shorts, but also for the clearing systems that their lenders and agents use to secure the funds’ trade settlements and financings.

Ignorance of clearing house rules, coupled with uneven disclosures had clearly inflamed social tensions over the GME short squeeze. These tensions were exacerbated when risk managers at clearing houses were portrayed in the media as fighting the popular uprising of legions of day traders.

Compliance with the DOL’s New Proxy Rules May Stump ERISA Fiduciaries

by David Schwartz J.D. CPA | Saturday, December 19, 2020 | All, Cross-Post, Lender Directed Voting

A counter-revolution in ESG Investing? On Friday, December 11, the Department of Labor (DOL) issued its final rules on proxy voting by ERISA fiduciaries. As proposed last August 30, the draft rules drew hundreds of responses by the ESG-directed investing community, many of which criticized the proposal as unworkable. The final version of the rules […]

Regulators Want ESG Funds to Justify their Strategies

by David Schwartz J.D. CPA | Thursday, October 29, 2020 | All, Formal Regulatory Remedies

Today the Department of Labor (DOL) issued final rules clarifying the regulatory guideposts for fiduciaries of private-sector retirement and other employee benefit plans in light of recent trends involving environmental, social, and governance (ESG) investing. The DOL is not the only regulator with ESG funds in their cross-hairs. The Securities and Exchange Commission (SEC) has begun verifying asset managers’ and mutual funds’ ESG strategies through examination and is considering amending the mutual fund “name test rule” to ensure funds are living up to their ESG promises to shareholders.

Squaring ESG with Securities Lending

by David Schwartz J.D. CPA | Monday, October 19, 2020 | All, Commentary, Cross-Post, Disclosure Regimes

Sustainable investing is becoming more important to investors when creating portfolios. As a result, institutions often follow policies with formal environmental, social, and governance (ESG) factors to guide their investments. They commit substantial resources to ESG research and produce comprehensive reports about their compliance. But then the same institutions give away their proxy votes when they lend securities for fees to cover their bank charges. And the loans of those securities – and their proxies – go to borrowers with unknown intentions, and often with unknown identities.

One market veteran asked if there is any other space in capitalist finance where the lender knows neither the specifics of the borrower nor the purpose of the loan? Given this opacity, can ESG factors really be squared with securities lending strategies?

Alarm Raised on Stock Loans for “Withholding Tax Schemes”

by David Schwartz J.D. CPA, Ed Blount | Tuesday, September 29, 2020 | All, Commentary, Cross-Post

European commissioners are reviewing a study from their securities and market authority (ESMA) that includes a recommendation for new laws to combat unfair trading practices and an extended remit for National Competent Authorities (NCAs) to conduct snap audits of securities loans and transactors. Loans deemed to be suspicious would prompt an inquiry to determine penalties for unfair strategies and inappropriate beneficiaries.

Category: