In advance of the annual ISLA conference in Berlin, ISLA's Kevin McNulty speaks to SLT
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SLT: How do you feel the securities lending industry has withstood the downturn?
McNulty: Generally, the market has fared well. It has survived as a business and it remains very much a live business. It survived the Lehman collapse and even though lenders had large exposures most lenders didn't lose money. If there was a black spot it was cash collateral, where some lenders have lost money. This impact was greater in the US, of course, where cash collateral makes up more than 90 per cent of the market. In Europe the impact was lower, but it did mean that the beneficial owners in Europe who historically took cash collateral had to take another look at their strategies.
The Lehman failure showed that market conventions served the industry well in terms of credit control and risk management practices. After Lehman, the industry took a step back and focused on the risks, constraints and controls.
SLT: You became chief executive last August. Was the market still in the eye of the storm, or had the worst already happened?
McNulty: The worst of the turmoil had mostly worked itself out. Since I took the helm a very large part of our focus has been working our way through the vast amounts of literature coming from regulators
SLT: How do you feel the regulatory environment will change? Is there anything industry participants should be wary of?
McNulty: We've seen activity designed to prevent naked short selling in Germany and France and we know for sure that something is going to happen covering this area.
We also expect some changes to the rules around transparency and possibly around cash collateral, although the latter seems less likely now. We are seeing demand in some parts of the world for reporting of securities lending transactions to become more transparent and public.
SLT: What are your views on a pan-European regulatory environment?
McNulty:We strongly believe there should be a harmonised EU view on regulation. We started the year with the belief that there would be a pan European approach to short selling but we have seen countries go it alone.
This view isn't just held by us; the European Commission also wants to see it. But we're some way from harmonisation. CESR looked at short selling regimes across the EU and commented there had been an uncoordinated approach to it through the crisis. We were optimistic that this would happen at the start of the year but we're not seeing it yet.
SLT: What has ISLA been able to do to ensure the securities lending industry has thrived over the past couple of years?
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