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ICMA Future Leaders (IFL) was launched three years ago to help people starting out in their capital market careers to really take advantage of the services that ICMA offers to its members. After all, more experienced professionals in the market have had the benefits of networking through our working groups and committees for many years, so why not extend this to the next generation? Since then we’ve rolled out the network across Europe, where it has over 900 members, with plans to expand to Asia Pacific in the next few months.

IFL is led by a steering committee of young people from member firms, who have already changed how ICMA communicates its goals and work to its membership. Specialist working groups within the steering committee are looking at Fintech, Education and this newsletter, continuing to input into ICMA’s activities and communications.

The IFL hold regular networking events around Europe, the next one is in Paris on 17 October, around the theme of Cryptocurrencies and ICOs, which are open to all ICMA members. At these events you can meet colleagues across the industry in an informal setting. To find out more or if you would like to get more involved in some of the working groups, then get in touch: futureleaders@icmagroup.org

Michael Sansen
Chair ICMA Future Leaders Committee

What is SFTR?


Key Takeaways

The EU Securities Financing Transactions Regulation (SFTR) entered into force in January 2016.
 
The SFTR affects how collateral moves around the financial system. This is not a niche area, the latest ICMA survey sets the baseline for the European repo market size at EUR 7,250bn.
 
The SFTR is based on 3 pillars: collateral reuse requirements, transparency to fund investor requirements and reporting obligations.
 
The European Commission is soon to endorse a set of key technical standards which define the details of the extensive reporting regime, likely to go live in Q1 2020.  
 
The ICMA European Repo and Collateral Council (ERCC) is driving the industry’s implementation preparation in relation to repo through its SFTR Task Force. 
 

Following the recommendation by the Financial Stability Board (FSB) and European Systemic Risk Board (ESRB) to increase transparency in the use of securities lending and repo (repurchase agreements), the European Commission put forward the Securities Financing Transactions Regulation (SFTR) which entered into force in January 2016 and will introduce extensive reporting requirements for securities financing transactions (SFTs).

SFTs, broadly speaking, are any transaction where securities are used to borrow cash, or vice versa. Practically, this mostly includes repos, securities lending activities, and sell/buy-back transactions. Effectively, the SFTR affects how collateral moves around the financial system. This is not a niche area, the latest ICMA survey sets the baseline for the European repo market size at EUR 7,250bn, the largest figure recorded since the survey began in 2001.

The SFTR is based on 3 pillars: 

  • Collateral Reuse Requirements (in force): the reuse of financial instruments which have been provided as collateral is subject to several conditions, which aim to ensure that clients and counterparties understand the risks involved in reuse and, in some cases, require consent. 
  • Transparency to Fund Investor Requirements (in force): the managers of UCITs and AIFs should make detailed disclosures to investors of the use they make of STFs and total return swaps. 
  • Reporting Obligations: once the requirements apply, counterparties will have to report SFTs to a trade repository to provide transparency to regulators on the use of SFTs.

The European Commission is soon to endorse a set of key technical standards which set out the details of the extensive reporting regime, likely to go live in Q1 2020. The ICMA European Repo and Collateral Council (ERCC) is driving the industry’s implementation preparation in relation to repo through its SFTR Task Force - an industry group covering users, both from the sell-and buy-side, trade repositories and other service providers.

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Replacing interest rate benchmarks

IBORs (Interbank Offered Rates), the rates at which banks lend to and borrow from one another in the interbank market, have long served a critical function in financial markets. It is estimated that contracts with a total notional value of over $370 trillion are referenced to the IBORs. These are mainly in the derivatives markets; but the cash markets in the form of loans and bonds, representing the real economy, constitute a significant proportion of the overall total.

Cases of attempted market manipulation and false reporting of global reference rates, together with the post-crisis decline in liquidity in interbank unsecured funding markets, have undermined confidence in the reliability and robustness of existing interbank benchmark interest rates. In fact, global regulators believe that IBORs are a potential source of vulnerability and systemic risk on the basis of this uncertainty, coupled with the large volume of financial transactions that reference these rates.

The key jurisdictions covering IBOR currencies have set up public/private working groups to study benchmark replacements for IBORs. These alternative benchmarks, also called RFRs (risk free rates), are described as being risk-free or nearly risk-free because they are based on a ‘robust’ methodology. Preferred RFRs selected by significant jurisdictions include: SOFR (USA), SONIA (UK), SARON (Switzerland), TONAR (Japan) and ESTER (euro area).

It matters a great deal what happens to IBORs and what replaces them. The transition needs to allow markets to function as normal, and companies to continue to raise funding or capital and manage the interest rate risk that comes with it, providing answers to questions like: ‘How will current loans, bonds and swaps behave when IBORs are phased out?’ and ‘ How will the market value financial products linked to IBORs?’

ICMA is actively involved in working groups based in the UK, EU27 and Switzerland. All require considerable attention given the importance of this transition. ICMA’s work is focused on how to ensure adoption of the new benchmark rates, how to deal with legacy issues for existing LIBOR-referenced bonds beyond 2021, international coordination and raising awareness.

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Key Takeaways

It is estimated that contracts with a total notional value of over $370 trillion are referenced to IBORs.
 
Global regulators believe that IBORs are a potential serious source of systemic risk and key jurisdictions have set up public/private working group to study benchmark replacements for IBORs.
 
ICMA is actively involved in working groups based in the UK, EU27 and Switzerland. Our work is focused on how to ensure adoption of the new benchmark rates, how to deal with legacy issues for existing LIBOR-referenced bonds beyond 2021, international coordination and raising awareness.
 

Changes to the buy-in regime


Key Takeaways

The CSDR Settlement Discipline (SD) package, including mandatory buy-ins, will likely come into force in September 2020.
 
The provision in the CSDR changes how buy-ins work, making them a mandatory obligation within a certain time period, rather than an optional right.
 
The anticipated consequence of the mandatory buy-in regime is to alter radically secondary market structure and behaviour, and how liquidity is provided within the EU, particularly for less liquid securities such as corporate bonds, SME securities, and emerging markets.

 

The Central Securities Depositories Regulation (CSDR) may look, at first glance, like a piece of legislation only dealing with the prudential regulation of CSDs and indeed it does deal with the efficiency and safety of CSD operations. Yet, its full title includes ‘improving securities settlement in the EU and on central securities depositories’ and it contains a section on ‘settlement discipline’. Among the paragraphs in this section is the provision for mandatory buy-ins, a hot topic for discussion by ICMA members since it was first proposed in 2014. The new provision changes the way that buy-ins operate legally, making them obligatory within a defined time period. It also changes the economic basis of the buy-in, which as it operates now, ensures that counterparties to the transaction return to the economic position they would have been in had the original transaction settled on the intended settlement date, whatever the fluctuation of the price of the securities in the interim.

Buy-ins are a widely available remedy in the event that a financial transaction does not settle (a ’fail’). It is the contractual right of the purchaser of securities to secure delivery of those securities from a third-party (ie buying them in) if the original selling counterparty is unable to make delivery.

The CSDR rule makes buy-ins mandatory if there is a fail and yet most settlement fails now aren’t bought in, sometimes they simply can’t be, as some securities are very illiquid; or buy-in agents can’t be found. Compared to the low number of fails, the cost of imposing a mandatory buy-in, in the proposed form, will be significant, affecting the overall functioning and efficiency of the market, not at all the intention of the regulation, as banks (market-makers) are likely to change their pricing to account for the increased risks created by the regulation.

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Are you a Future Leaders Essay prize winner?

You could be if you work for an ICMA member firm and are starting out in a career in finance. Now that the summer holidays are over, there’s time to make a submission to the Future Leaders Essay Prize Competition, before the end of October. All that’s required is an essay on the theme ‘How will bond markets look in ten years’ time?’ As an extra incentive we are offering cash prizes to the winners, details here.


IFL resources to help you

Explainer on the ICMA help desk
What ICMA does and how to Get involved.
The ICMA mentoring platform matches mentors and mentees from all ICMA member firms. Over 200 people have already found mentors to help them in progressing their capital market careers.


Regulatory approaches to FinTech and innovation in capital markets

Read the latest briefing by ICMA’s Gabriel Callsen looking at how financial regulators are  starting to approach FinTech. Based on publicly available information it brings together selected regulatory initiatives across 26 jurisdictions within Europe, Asia and North America, giving a sense of the regulatory direction of travel, specifically for cross-border debt capital markets.

You can also access a listing of new applications of FinTech in bond markets taken from public sources which we have made available on the ICMA website.

FinTech jargon

FinTech has its own jargon and acronyms that make it hard to navigate sometimes. We put together a glossary to make it easier. We will be updating the glossary regularly.

Crypto Token

Crypto tokens are special kind of virtual currency tokens that reside on their own blockchains and represent an asset or utility. Such crypto tokens often serve as the transaction units on the blockchains that are created using the standard templates like that of Ethereum network that allows a user to create his/her own tokens.

dAPP

Decentralized Application. This refers to an application that uses an Ethereum smart contract as it’s back-end code.

ERC-20

A token standard for Ethereum, used for smart contracts implementing tokens. It is a common list of rules defining interactions between tokens, including transfer between addresses and data access.
Read more


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