Enterpr ise Risk • Credi t R isk • Market R isk • Operat ional R isk • Regulatory Compl iance • Secur i t ies LendingEn te rp r i se R isk • Cred i t R isk • Ma rke t R isk • Opera t i ona l R isk • Regu la to r y A f f a i rs • Secu r i t i es Lend i ng

34TH ANNUAL RMA CONFERENCE ON SECURITIES LENDINGCONFERENCE HIGHLIGHTS

34TH ANNUAL RMA CONFERENCE ON SECURITIES LENDING

October 9–12, 2017 The Ritz-Carlton, Naples Naples, FL

The RMA Executive committee members, along with this year’s conference co-chairs developed an extensive business program to provide practical solutions to industry challenges securities finance professionals currently face. The discussion topics in the conference business program were designed to be immediately put into action. The conference began Tuesday with a look at data of securities on loan and provided insights into collateral and cash reinvest rates. The latest updates on the legal and regulatory landscape followed, covering implementation issues related to Dodd-Frank, Basel IV, SCCL, NSFR, and the DoL Fiduciary Rule. Tuesday’s panels closed with a look at opportunities in the Latin American markets, along with the challenges currently facing investors, prime brokers, and agents.

We were privileged to have Mr. Seth B. Carpenter, Chief U.S. Economist from UBS join the conference Wednesday to deliver the keynote address to participants. Panels on Wednesday discussed compliance issues related to SFTR and MiFID II along with the status of implementation. Next, questions and updates on CCP models were covered, including indemnification and post trade processing under the CCP lending model. Wednesday’s discussions wrapped with a focus on securities finance operations. Issues including tri-party collateralization, noncash collateral, and new technology builds highlighted the panel.

Thursday’s program began with the evolution of the securities finance business and the increased importance of noncash collateral along with the management of HQLA. Next, attendees discussed challenges in cash reinvestment, including the impact of money market fund reform and declining issuance in the short(er) end of the curve. Disruptive technologies made an appearance, with panelists debating the potential of distributed ledger technology, robotics, and machine learning in the industry. The conference wrapped with the annual Industry Leaders Panel, with senior leaders discussing their views on the business and their outlook for the future of securities finance.

RMA is a member-driven not-for-profit professional association with approximately 2,500 institutional members. Its purpose is to advance the use of sound risk management principles in the financial services industry. RMA promotes an enterprise-wide approach to risk management that focuses on credit, market, and operational risks.

Attendees were encouraged to actively participate in the discussions to promote dialogue, share ideas, and debate the challenges facing our industry. We hope you enjoy the highlights of the 2017 conference.

We look forward to seeing you at the 2018 conference in Key Biscayne!

DEAR COLLEAGUE

TUESDAY

The opening panel of the conference provided a data-themed update on the industry and its trends since 2010. The panelists and moderator told this story, not through perception and business understanding, but through the straight use of various data sets, within the liability and asset side, to measure changes to the business. The group discussed details around the benefits of certain markets, and touched on collateral acceptance including cash, noncash, and what has been driving the agent-

to-borrower and even broker-to-broker activities over the past several years. Obviously, regulation has affected much of this activity, in addition to capital issues, so this session provided great insight by using true numbers to tell the story, with expert technology product managers around the securities lending data-set structure. A brief post-discussion dialogue in the form of a Q&A with attendees wrapped up the session.

Global Markets and the State of The Industry

Global Regulatory Update and Geopolitical Risks

The global regulatory update and geopolitical risks panel offered an overview on how worldwide events are influencing the securities lending market. In the U.S., President Donald Trump is pushing back against post-crisis regulation, while in Europe, the Basel Committee is preparing for its next campaign on financial market insecurity. Meanwhile, the U.K., which is in the throes of its Brexit negotiations with the E.U., is threatening to undermine traditional supervisory standards through a unique third-party status. Expect discussions on how these regulatory issues are affecting transactional documentation for securities lending.

This panel discussed how the embattled Dodd-Frank Act has been traded in for a sleeker, less cumbersome model in the form of the CHOICE Act, which is waiting to be seen by the U.S. Senate. In Washington, regulatory rule writing has stalled since Trump took office, and we are yet to see the final version of the net stable funding ratio or the single counterparty credit limit rules. Meanwhile, no sooner has Basel III begun to bed down than Basel IV rears its head. The next iteration of everyone’s favorite regulatory framework is expected to involve consolidating the various regulatory frameworks currently being implemented.

Latin American Market Opportunities

Investors, prime brokers, agents, and other securities lending participants face increasing challenges across the various Latin American markets. Each market differs when it comes to the role of central counterparties (CCPs) and their effects on the traditional over-the-counter/offshore models.

MexicoMexico is experiencing a short of supply in the local market, which represents a potential opportunity for off-shore beneficial owners to generate revenue. There are some hurdles to overcome if beneficial owners want to maximize their portfolios, including securing local counterparts and local collateral. The local broker Nacional Financiera, S.N.C. (Nafinsa) has agreed to partner with RMA and its members to help navigate these issues with regulators and local counterparts.

BrazilBrazil continues to experience excess demand that could be met by offshore beneficial owners, according to one panelist. The B3 clearinghouse has implemented numerous enhancements to settlements and taxes, but the CCP model is still hurting offshore lenders. Also, one panelist noted that although the addition of the Depository Trust Company as a subcustodian shows some movement regarding collateral transparency, there is still much work to be done. B3 has committed to working with RMA and its members on possible solutions.

Colombia/ChileBoth countries are CCP models that work well for local participants but are not that friendly to offshore holders, said one panelist. Most of the business execution is done synthetically and is more of a prime broker issue, as the prime would typically be the owner of the asset. Both are tax ID markets, which means free delivers are frowned upon and make lending nearly impossible. Further, both markets have gone on record noting they are looking to grow foreign investment and would be open to discussion on how to amend or enhance the process.

PeruPeru suffers from a lack of demand, with short selling in the country not very common. Peru is also trying to attract foreign investors and prime brokers. Partnering with the U.S. broker community, Peru has been working on a CCP model over the past two years. In other changes in this market, a prominent local custodian is developing a workable reporting platform, and work is near completion on an appendix to the Global Master Securities Lending Agreement.

RMA is interested in forming a Latin American subcommittee to work with each of these markets as well as with Securities Industry and Financial Markets Association and local brokers/bank partners to move some of these initiatives forward.

The European Union (EU)-originated Securities Financing Transactions Regulation (SFTR) and the Markets in Financial Instruments Directive (MIFID) are arguably two of the most significant transparency initiatives the securities lending industry has seen in several years. They undoubtedly will affect beneficial owners, lending agents, and borrowers across the industry, having an impact on trading processes and relationships.

The SFTR is a major EU regulation requiring dual-side reporting for each securities finance transaction (SFT) across approximately 90 data fields. The timing of SFTR is uncertain, but the European Commission’s review of the final report is expected by end of the year, and the estimated phased go-live of the SFTR Transaction Reporting obligation is expected to be first-quarter 2019. In addition to securities lending, SFTR also covers repurchase agreements and margin lending.

EU-domiciled participants will be directly affected by SFTR implementation; non-EU lenders (e.g., those in the United States) are indirectly implicated if they trade with EU borrowers. SFTR will require firms to report all of their SFTs to an EU trade repository. Agent lenders are looking to provide reporting services to beneficial owner clients, with options to include internally developed solutions and new vendor products.

Although MIFID II goes into effect on January 3, 2018, there remains a general lack of consensus about the impact to securities lending, and ISLA is working with European counsel to gather more information. MIFID II is designed to promote investor protection and transparency, and panelists believe other transparency initiatives may materialize in other jurisdictions such as the United States or Japan, although what form they take is debatable.

In addition to increased transparency of markets, MIFID’s other goals include lower cost market data, orderly trading behavior within markets, and improved execution. However, panelists warned that transparency initiatives require significant investment by industry participants that will somehow need to be absorbed. These costs could include technology development, vendor costs, and transaction repository costs, but all of them and others may drive some participants out of the lending market.

Extraterritoriality: SFTR and MIFID II Compliance

WEDNESDAY

Central counterparties (CCP) for securities lending have been a major topic of discussion for the securities lending industry for many years. What are some of the key drivers and benefits to counterparties of centrally cleared trades, and do they work for everyone? Historically, beneficial owners want and expect excess margin but there are some that can’t post margin—how can this scenario be reconciled and how can CCPs work for them?

There are several potential risk mitigating effects and relief provided for certain regulatory constraints, including the leverage ratio, risk weight assets, and single counterparty limits. However, a number of challenges persist before CCPs are broadly used for agency securities lending transactions. With that said, there have been several significant developments recently, including:

• The interdealer securities lending and borrowing balances flowing through the OCC’s CCP have reached more than $140 billion.

• Eurex announced its first direct access client, Dutch pension fund PGGM.

• FICC has rolled out a direct access clearing product for clients and has expanded its existing sponsored repo clearing products to support participation by a broader array of institutional clients. It also hopes the new product will allow two-directional client activity.

Internationally, various CCPs continue to work with both agent lenders and broker-dealers developing products that will help meet the needs of beneficial owners, agent lenders, and borrowers. The panelists said they expect continued development to ultimately lead to products that will serve all constituents in a manner that will enhance and complement existing market structures, help market participants optimize risk and return, and address regulatory constraints.

CCP Update: Are CCPs Still the Future of Securities Finance Transactions?

Future Market and Regulatory Impacts of Securities Lending Operations

Securities finance plays a significant and increasing role within regulatory reform, with multiple operations impacts including the shift toward noncash collateral. Panelists believe that, bilaterally, this shift will be unscalable to support within operations and will likely require U.S. adoption of tri-party collateralization.

The pending reform to Securities and Exchange Commission Rule 15c3-c to allow equities as a form of collateral indeed presents several operational concerns. For instance, one panelist said equities as collateral “will be impossible to manage” through the current bilateral flow in the United States. A tri-party model would need to be adopted if using equity as collateral

is approved. Panelists also mentioned, however, that there are opportunities to “step into this space” that will benefit both lenders and brokers when processing through a tri-party.

Also, the evolution of technology, for example, robotics, could also revolutionize the operations role as we have come to know it, perhaps making it more technical and less process-oriented.

THURSDAY

No conference in 2017 would be complete without a panel that addressed the enigma that is the influence of blockchain in securities lending and to assess the role that peer-to-peer and all-to-all lending platforms have to play in today’s market. The past 18 months have seen a plethora of innovative trading platforms entering the securities financing arena, and many conference attendees represented what is arguably the fastest-growing sub-

segment of the market. The panel discussed the introduction of distributed ledger technology and peer-to-peer lending, and if they are really bringing a threat of disintermediation that will see traditional agent lenders out on the street? Or, much like the argument for central counterparties, are these platforms simply going to become another feature of the mainstream market.

Innovation and Disintermediation of the Securities Lending Industry

Today’s securities lending participants face a barrage of challenges and pressures in multiple forms, from income regulation to evolving lender and borrower demands. The industry landscape is changing before our eyes and in order to continue to thrive we must analyze the new opportunities that change brings, and be willing to adapt when needed.

The final panel of the conference put the traditional lending model under the microscope and asked whether it’s still fit for purpose. New innovation and market entrants were acknowledged and discussion centered on how they can be made to work in the new environment. Additional topics debated by the panelists included the consequences of the rise of quantitative hedge funds, the effects of regulation on supply and demand, and new risks, such as what to do with all the data firms are required to manage.

Industry Leaders Panel

We thank all of our attendees for joining us this year in Naples. This year’s conference was very successful in terms of the breadth of knowledge shared by our panelists as well as the relationships strengthened among industry professionals. Thank you to all of our speakers and moderators for sharing their insights with conference attendees and to the sponsors who help RMA hold this event each year.

Brendan Cusick & Jill RathgeberRMA Conference Co-chairs

THANK YOU

OUR SPONSORS

DATALENDOUR INNOVATION. YOUR ADVANTAGE.

DATES AND LOCATIONS OF FUTURE CONFERENCES

Please note: These dates and locations are provided for your information only. Hotel group reservations will not be available at any hotel before RMA’s release date.

CONTACTS

Speaking Opportunities: Fran Garritt, Director, Securities Lending FGarritt@rmahq.org

Paul Guinan, Manager, Securities Lending PGuinan@rmahq.org

Registration: Rosemarie Casler RCasler@rmahq.org

Sponsorship and Exhibiting: Kimberly Collins KCollins@rmahq.org

We look forward to you joining us next year in Key Biscayne, FL!

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