News
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.
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.
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.
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.
Reddit Trading and Resilience in U.S. Equity Finance Part 2
On February 4th, 2021, the Securities and Exchange Commission called for a “robust public discussion” about whether online brokers’ late January suspensions of retail trading should lead to changes in the market infrastructure. In the view of attorneys for the aggrieved retail traders, there will be a lot for the SEC to consider. More than 50 lawsuits have been filed as of today, creating another form of discussion. Our blog series on the potential infrastructure changes continues with a few of the likely discussion topics.
A large class-action lawsuit has cited, as evidence of an anti-trust conspiracy, the alleged wave of selling by hedge funds and institutions in the overnight markets of January 27th, 2021. Plaintiffs allege that the hedge funds, their brokers and the institutional investors conspired to prevent further increases in the prices for the contested issues, which would have deepened their already-substantial losses.
Reddit Trading and Resilience in U.S. Equity Finance Part 1
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.
Moving ESG Beyond Policy into Practice
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.
Managing Cash for Changing Flows and Structures
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.
Bankers: We’re Losing Control of the Narrative on Securities Finance
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