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RESTORING TRUST IN MARKETS: RMA Podcast Series
Creating ESG Models to Change Negative Views of Financial Markets Good morning, this is Ed Blount and I am speaking to you from the Center for the Study of Financial Market Evolution here in Washington, D.C. I’ve been asked by my good friends at the Risk Management Association, RMA, just up the road in Philadelphia, […]
Apple Sauce or Orange Juice?
Databases designed for specific purposes often fail when asked to solve a different problem. As an example, the securities finance databases of leading data providers such as FIS Astec, Datalend, and IHS Markit, designed more than 20 years ago for performance benchmarking, are inadequate when queried for the purpose of the loans themselves. Even regulatory databases enriched with new SFTR filings can only help supervisors monitor leverage based on end-of-day positions, and are unable to determine the propriety of the loans without mapped flow data.
Get Your ESG House in Order
Environmental, social, and governance (ESG) investing has taken global financial markets by storm over the last few years. Post-pandemic, the demand for ESG investments has only intensified and has proven to be much more durable than a fad. However, lack of consistency and transparency threatens the trustworthiness of ESG as a category, and has led to accusations of ‘greenwashing.’
Live by the Sword. Die by the Sword. Part 1
January’s GameStop frenzy, where amateur online retail traders took what they hoped would be a rollicking joyride through the world of high finance, has left regulators scratching their heads about what to do next and the retail buccaneers themselves with quite a hangover.
Fund Advisers Brace for ESG Scrutiny
After nearly twenty years of study, the Securities and Exchange Commission seems poised to rewrite the rules on proxy disclosure for mutual funds. Two SEC commissioners predicted within days of each other that there will be radical revisions to how regulated investment companies will report their proxy voting behavior. Both Acting Chair Allison Herren Lee and Commissioner Caroline Crenshaw said in separate speeches last month that the SEC’s current proxy reporting form is not meeting the needs of investors.
SEC’s ESG Momentum Turns to Proxy Voting
Allison Herren Lee, the Securities and Exchange Commission’s acting chair, called for more disclosure and transparency about proxy voting by mutual funds and institutional investors to ensure they line up with shareholder sentiment, particularly environmental, social, and governance (ESG) issues.
Reddit Trading and Resilience in U.S. Equity Finance Part 3
Pressure is growing on industry and government to respond to 2021’s extreme stock market volatility. Following on the controversy around the GameStop retail buy-side suspensions, one of the remedies being discussed is shortening of the settlement cycle and, perhaps, even a shift to real-time settlement in the US equity markets.
EU Tips the Scales toward ESG-Friendly Financial Firms
The European Union has embarked on an aggressive legislative push to make environmental, social, and governance (ESG) considerations as a focus of financial services industry regulation. The first salvo in the EU push, the Regulation on Sustainability-Related Disclosures in the Financial Services Sector (SFDR), was finalized in December of 2019, with an implementation deadline for key provisions (Level 1) on March 10, 2021. The new regulation is broadly applicable to almost any type of asset manager, including investment firms, banks, pension funds, and insurance companies. The effect of SFDR is expected (and may even be intended) to be felt beyond the financial sector, shifting market appetites toward ESG-friendly companies, giving such companies a competitive advantage in the ability to raise capital in the corporate finance market.
The SEC Puts ESG Mutual Funds to the Test
Interest in ESG investing and the broader area of sustainable finance has exploded over the past few years. Both institutional and retail investors are clamoring for ESG investment options. According to one recent Morgan Stanley survey, 95% of millennials and 85% of all investors are now interested in sustainable investing strategies. Consequently, the highly competitive mutual fund industry has gone into overdrive, creating ESG mutual funds to attract these investors. Given the high demand and the growth of new mutual funds aimed at these ESG-conscious investors, it was only a matter of time before the regulators noticed. Over the past year, the SEC has been unfolding a larger plan to police and regulate sustainable and ESG finance.
Central Clearing for Securities Lending
DTCC has applied to the US Securities and Exchange Commission for permission to launch a securities finance clearing service. DTCC’s fixed income arm, the National Securities Clearing Corporation (NSCC), spearheads the central clearing initiative, touting the numerous efficiency benefits to clearing customers, including increased capital efficiency for both borrowers and agent lenders and a reduction in counterparty risk by novating to NSCC the completion of settlement obligations. Despite the reduction of counterparty risk offered by central clearing, the service is not without its costs. Central clearing is paid for by both borrowers and lenders, potentially cutting into already marginal income from securities lending. Switching from bilateral to central clearing is dependent on a complex cost-benefit analysis. Securities lending market participants must consider margin requirements, trading liquidity, and comparative ease of trade in central clearing versus bilateral clearing. Meaning central clearing may be cost-effective for some but not for others.