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

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.

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.

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 […]

Banking Leaders set to Control ‘Shadow Exposures’

by David Schwartz J.D. CPA | Tuesday, December 01, 2020 | Commentary, Cross-Post

Shadow banking is history, say banking leaders, a thing of the past. New compliance and risk management systems based on the Securities Finance Transaction Regulation (SFTR) and the industry’s evolving Common Domain Model (CDM) will enable financial service providers to regulate their clients’ exposure to counterparties with far more specificity than ever before possible. Originally accepted as a regulatory imposition, bankers are now viewing the SFTR reports of their loan principals as a platform to help state pension funds and others meet their ESG and tax compliance goals with unprecedented precision — along with proof of funding.

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.

EU Tax Officials to Audit Securities Finance

by Ed Blount | Saturday, September 19, 2020 | All, Commentary, Cross-Post, Procedural Changes

The European Securities and Markets Authority (ESMA) has recommended that the market regulators in EU Member States combine trade data generated from the Securities Finance Transaction Regulation (SFTR) with local surveillance data so as to empower tax authorities to catch and indict tax abusers. To the abusers, that is like saying that the Sheriff and Posse are closing in on their SFTR trails.

(No kidding. What did they think? And if the abusers haven’t created defenses by this time, it’s already too late.)

Governance in the Age of Financial Crises

by Ed Blount | Wednesday, June 24, 2020 | All, Cross-Post, Traditions

In the coming corporate bankruptcy crisis, banks and companies perceived as bad actors in society will find their resolution terms to be very harsh. To avoid being diluted or even wiped out, large shareholders and corporate boards of directors must be constantly vigilant in exercising their oversight duties. Stakeholders must enforce policies which require company management to act in a socially responsible fashion.

ESG-compliant Solutions to Stock Lending Bans

by Ed Blount | Wednesday, December 04, 2019 | Commentary, Cross-Post

Stock lending agents and prime brokers were challenged with a once-in-a-career opportunity after the December 3rd, 2019 announcement that Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, had decided to ban the lending of their offshore stocks — nearly half of their holdings. That bold decision by the fund’s CIO will reportedly cost as much as $300 million in lost annual income and “could prove hugely disruptive to equity markets if others follow its lead,” according to the Financial Times.

Taking Stock of Blockchain for Improving Securities Services

by Ed Blount | Saturday, October 19, 2019 | All, Commentary, Cross-Post

The early torrent of media hyperbole about distributed ledger technologies (DLT), such as blockchain and shared ledgers, has now been supplanted by reflection on lessons learned. Scaling concerns were allayed to some degree by DTCC’s November 2018 report that its study of throughput capacity for DLT was sufficient to handle massive U.S. equity trading volumes.

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