Keep on top of the regulation changes
SOURCE: CHARTERED BANKER, OCTOBER / NOVEMBER 2009
The Bank of England’s Securities Lending and Repo Committee published its revised version of the Securities Borrowing and Lending Code of Guidance in July 2009.
The Code summarises the basic procedures which UK-based participants in securities lending and borrowing of both UK domestic and overseas securities ought to observe as a matter of good practice. It will be kept under regular review as the International Securities Lending Association (“ISLA”) has stated that, in future, it should be regularly updated to react to market developments.
UK-based participants include those who are: principals making markets and trading; brokers intermediating in the securities lending market; end users lending stock from their own portfolio; and agents (such as fund managers) undertaking stock lending business on behalf of their principal clients. All such participants should understand the code which is intended to apply to all participants in the securities borrowing and lending market, including beneficial owners, pension and other fund managers and trustees or their agents or advisors.
The Code is not intended to apply to transactions in which title to the securities does not pass and it does not in any way replace existing regulatory requirements or any internal systems of management control. Therefore, all participants still require to observe existing UK regulatory requirements and to satisfy themselves independently that adequate internal controls are being exercised over all aspects of their participation in securities lending and borrowing.
The Code is split in two. The first section sets out general standards which are expected to be adhered to, for example that participants should ensure that their activities do not cause market disruption through fails, or lead to reputational damage to the market; and that all securities lending transactions should be subject to a written legal agreement between the parties concerned. The second part deals with market practice for securities lending and includes matters which need to be considered before entering into transactions with a new counterparty; what participants ought to agree at the point of trade; and best execution and agency lending.
The revisions to the code include new sections on best execution under the Markets in Financial Instruments Directive (“MFID”). This includes obligations to take all reasonable steps to obtain the best possible result for its clients, taking into account the execution factors. The code states that lenders of securities as agent on behalf of beneficial owners should consider whether they are subject to 'best execution' requirements under MFID, depending on the status of their clients (retail, professional, or eligible counterparty) and the facts and circumstances of their business. Transactions with clients classified as eligible counterparties are not subject to best execution requirements unless those counterparties request such treatment.
Further revisions may be made to the operational aspects of the Code after ISLA has consulted with market participants and proposed amendments around risk and defaults.
This is another example of the increased regulation and guidance being issued to tighten market practice in the banking arena, and it is essential that all participants continually review their own internal guidelines and market practice to ensure that it is in line with this and any otherregulation which is constantly being issued, and reviewed.
author: alex innes
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