The interest focus of the International Securities Lending Association (ISLA) is global, but its voice is now increasingly European , says Ian Hovey, current chairman of the London-based association.
The securities lending world divides into three parts when it comes to market associations looking after the interests of those engaged in securities lending, the other two bodies are in the US and the Far East. We are viewed very definitely as the European body."
Hovey, who is head of securities lending at Deutsche Bank in London, says that it is only in the last five years that the membership has really broadened out from the UK base. "We now,for example, have a number of Dutch institutions, including a number of pension funds," he says. "The association is very keen for investors to become involved as members." It is not just a body for the market professionals but for the lending institutions as well. "Some ISLA members are lenders, but who do all their lending through their custodians."
The biggest upsurge in membership came after the association launched the overseas lending agreement (OSLA), which is now widely used globally. "People joined just for the purpose of obtaining this documentation."
In the last few years, the issues being focused on are no longer primarily UK-market related, partly due to due to the market there becoming more stable. Though, Hovey points to the situation that blew up last year requiring all hands to the pumps when the authorities' new custody regulations were unleashed on the UK industry. "We could have lost 70% of this business, but ISLA lobbied and the outcome was a situation where the lending business could still work and the regulators felt they sufficient controls." To his mind, this highlights one of the main roles of ISLA in any market, to to point out as practitioners those areas where problems will arise with new regulations or requirements, often from well intentioned authorities. "We will always be ready for the new issue that suddenly blows up."
Hovey believes that Europe will take on more of the UK initiatives in the securities lending area in the future. "The continent as a whole does not have a significant number of segemented regulations for securities lending, and the UK approaches could become Euro-wide." He points to the situation in continental markets some years ago, where it was largely unregulated, with often no collateral being given as part of lending transactions. "People could do whatever they wanted with no comeback at all." But much of that has changed substantially and already " a lot of what was practised in the UK has just been transported across". ISLA wants to see more best practice adopted across Europe.
Another key area the association is looking at is 'collateral interests'. " We are examining the issue of perfection of title to collateral in different European jurisdictions. While we have only looked at a number of markets, the question we asked was whether there were any difficulties to pledging collateral." This issue is central, Hovey explains: "If I give a loan to someone and they give me a security as collateral, in the event of default are you still able to have title to it under the current agreement structure in that jurisdiction?"
The answer was surprising, as it was possible in some markets that country-legislation could come into effect and lenders could find in certain circumstances thatthey did not have proper title. "We have successfully lobbied one country to change its internal legislation."
With the euro's arrival, ISLA was careful not to tread where other market bodies were hard at work and initally held its fire until a few months ago. It then moved in to sweep up areas it felt had not been fully covered, particularly as to the practices to be adopted at the year-end changeover. "While we are not taking a direct face role, we are definitely doing what we can to ease the conversion process," says Hovey.
What the euro will mean for security lending is by no means certain, but Hovey personally is bullish: "This will be a novel, unknown and potentially big market for lending."
One major intiative currently on the blocks is the consolidation of lending agreements, so that the three or four main ones in use, including OSLA, do not have to be amended separately when there is a tax or lesgislative change. "We hope this will be successfully concluded by the end of the year."
On the continent, the regulators will be taking a keener interest in securities lending over time as they become more involved in the investment business, Hovey predicts. It is essential in his view that all sides in the lending arena become more involved. "Our mandate is driven by what our members think the issues are. Currently, the association looking at what impact the joining of the London and Frankfurt stock exchanges will have on lending. We take on anything that will affect our members' business." Fennell Betson"