FREE SITE REGISTRATION

Sign-up today and take advantage of member-only content – the kind of timely, cutting edge industry insight that only Securities Industry News can deliver.


FREE site registration entitles you to:

Exclusive Online Only Content

Newsletters and Alerts

Industry White Papers

Online Seminars...and Much More!


European Trade Group Issues Agency Lending Disclosure Model

The London-based International Securities Lending Association (ISLA) has issued guidelines on how European lending agents--namely custodian banks--should relay to borrowers information on the underlying lenders of securities.

“Currently, some lending agents are sending information on a daily basis and some monthly,” said ISLA chief executive David Rule. “The new model will standardize daily reporting, harmonizing as much as possible with the successful U.S. model while meeting the European needs for complying with Basel II.”

Comments on the trade group’s proposed operational model, published on May 2, are due May 31. The ISLA working group that created the model includes representatives from ABN Amro, AIG, Banco Santander, Barclays Global Investors, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Kleinwort, Fortis, Goldman Sachs, HSBC, JP Morgan Chase & Co., Lehman Brothers, Nomura, Northern Trust Corp., Merrill Lynch & Co., Morgan Stanley, Prudential, Royal Bank of Scotland, State Street Corp. and UBS.

Thus far, the U.K.’s Financial Services Authority (FSA) is the only European regulator to establish guidelines for broker-dealers and agent banks to comply with the lending disclosure requirements of the Basel II bank capital standards. Since Jan. 1, the effective date of Basel II, the FSA has required that agents operating in the U.K. share with borrowers the identity of their underlying lenders and provide details of exposures every month. Beginning Jan. 1, 2010, the lending agents will have to provide full disclosure on principal lenders by the day after a deal is settled.

Like their U.S. peers prior to 2006, when the Securities and Exchange Commission instituted its agency lending disclosure (ALD) initiative, U.K. brokers calculate capital on an agency basis--the exposure related to the entire amount lent for a particular security received from the agent lender--rather than on a principal basis.

The ISLA guidelines largely reflect the U.S. model. The group says that European agents should provide borrowers with daily files detailing the outstanding loans and allocation of collateral delivered by the borrower according to the underlying lenders. Agents should also follow U.S. guidelines when informing borrowers that principal lenders are joining or leaving their programs.

The ISLA recommends that messages relating to the identity of underlying lenders be routed through the U.S. Depository Trust & Clearing Corp.’s (DTCC) Smart-Track communications hub. Firms using the Smart-Track service can also obtain unique identifiers for non-U.S.-based principal lenders through DTCC.

The Smart-Track message formats will have to be adapted slightly to meet European requirements that are not part of the U.S. ALD initiative. Agents will need to report to borrowers information about repurchase agreements, or repos, conducted with principal lenders. Information on underlying lenders’ reverse repos can be reported on an optional basis.

“In its role as a communications hub, Smart-Track notifies the sender that it has received the file and that it has made the file available to the receiver; creates a receipt record for the sender or generates an error code if it cannot deliver the file; [and] provides a Web application for agent lenders, borrowers and vendors to browse the status of files being processed and to request the creation of unique identifiers for principal lenders,” wrote DTCC in its proposal to serve as the messaging hub for the project. DTCC explains its operational role in a document posted on the ISLA Web site

European firms that are DTCC members can use the existing U.S. file formats to report business on the Continent via Smart-Track. The New York-based utility says it will make the hub available to ISLA members who are not DTCC participants by year-end. ISLA recommends that all firms test the new messages types by mid-2009 so they can be prepared ahead of the FSA’s January 2010 deadline.

Related Items

Marketplace