Spain
04 September 2018
After almost a decade in the securities lending market, big things are happening in Spain. Walter Kraushaar of Comyno explains more
Image: Shutterstock
For almost 10 years, Spanish market participants and official bodies tried to put forward proposals for a regulatory framework that allows Spanish mutual funds (UCITS and SICAV) to create a fully functioning over-the-counter securities lending market in Spain. But due to the financial crisis and its strong negative effects on the Spanish economy, no progress had been made so far. The Spanish government did not want to allow additional pressure to happen on the securities markets deriving from an increased supply of securities for shortening the weak markets.
Meanwhile, the markets are rallying and the economic situation in Europe as well as in Spain have improved substantially. Most of the European countries have found a regulatory framework for securities lending transactions of their investment funds. This has enabled them to create a decent additional income by conducting a successful securities lending business through several new structures like ‘evergreens’ and ‘collateral upgrade trades’, as well as high-quality liquid asset (HQLA) lending.
In 2016 Inverco, Spain’s association for collective investment institutions and pension funds updated the initial proposal submitted in 2008 and recommended changes to the country’s securities lending framework, to eliminate the competitive disadvantage currently faced by the Spanish investment fund industry as compared to their European peers (namely France, Germany, UK and Italy where securities lending for UCITS funds has been allowed for a long time).
At present, securities lending is only allowed to be used by Spanish mutual funds to cover settlement fails. Those short-term transactions, do not provide the revenues that can be achieved by the longer term and higher volume transactions mentioned above.
Government officials finally launched a consultation in April this year on the proposed changes to the country’s stock loan regulatory framework, to eliminate the disadvantageous treatment of Spanish mutual funds compared to their peers in other European countries.
The International Íø±¬³Ô¹Ï Lending Association (ISLA), a trade association established in 1989 to represent the common interests of participants in the securities lending industry, responded to the consultation in May this year to support the initiative and to harmonise the strict existing rules and regulations for securities lending of UCITS fund assets in the EU countries where securities lending is already allowed for mutual funds.
Those rules and regulations were made for reaching a higher profitability while protecting the investments in the light of a unique Capital Markets Union agenda across Europe. The new regulation—most likely to be announced in Q1 2019—will allow Spanish mutual funds to perform its securities lending business on the same legal framework as most of the other European-based investment funds already do.
According to sources who are familiar with the situation, the current ministry of economy, Nadia Calviño, has approved the suggested new regulation. It now must be published first in a public audience/hearing and after receiving the comments of interested parties it will be sent to the Council of State for final approval.
An analysis of Inverco with data provided from DataLend lead to very promising results of the upcoming new opportunities for the Spanish investment fund industry.
Following Inverco’s proposal, allowing funds to lend their entire portfolio, in line with the European Íø±¬³Ô¹Ï and Markets Authority (ESMA) guidelines, the study delivered the following results: It is likely to lend more than 60 percent of the current assets of respective Spanish investment funds.
In absolute terms, it will mean new liquidity of about €180 billion asset value available for lending.
Market analysis indicates that the potential additional income, created by the new types of securities lending transactions will be at least around 10 to 14 basis points (0.1 to 0.14 percent), which equals an annual income of approximately €255 million.
This huge—currently untouched—market potential will force Spanish and international custodians, asset managers as well as investment banks and broker-dealers to provide a reliable infrastructure to Spanish investment fund managers to help them to distribute the lendable assets, manage the respective collateral properly and enable them to receive the forecasted additional revenues on their investments.
Given the size of the lendable assets and the number of new participants in the market, there will be some investments in the Spanish securities lending market necessary to enhance the current basic IT infrastructure.
Strategic consulting is also essential to evaluate the best strategy for the respective funds and asset managers to enable them to lend out those newly available assets.
Given the short preparation time, it is crucial for the business to put the necessary infrastructure in place within a short time frame, to gain from ‘first mover advantages’ with an early entry in this new market segment.
It will be essential for any market participant who is after a part of this ‘big new cake’ to develop and provide a proper digital IT-platform with full connectivity to the respective investment funds as well as to other service providers like market data providers, post-trade and settlement providers and reporting tools for Íø±¬³Ô¹Ï Financing Transaction Regulation as well as CCP’s.
Comyno is already active with strategic advice about this topic and it’s newly enhanced ‘C-one’ platform has been upgraded to be able to deliver tailor-made solutions and full connectivity to enable investment funds, broker-dealers, banks, custodians and agents to explore and make use of this new market opportunity arising in Spain in the coming year.
Meanwhile, the markets are rallying and the economic situation in Europe as well as in Spain have improved substantially. Most of the European countries have found a regulatory framework for securities lending transactions of their investment funds. This has enabled them to create a decent additional income by conducting a successful securities lending business through several new structures like ‘evergreens’ and ‘collateral upgrade trades’, as well as high-quality liquid asset (HQLA) lending.
In 2016 Inverco, Spain’s association for collective investment institutions and pension funds updated the initial proposal submitted in 2008 and recommended changes to the country’s securities lending framework, to eliminate the competitive disadvantage currently faced by the Spanish investment fund industry as compared to their European peers (namely France, Germany, UK and Italy where securities lending for UCITS funds has been allowed for a long time).
At present, securities lending is only allowed to be used by Spanish mutual funds to cover settlement fails. Those short-term transactions, do not provide the revenues that can be achieved by the longer term and higher volume transactions mentioned above.
Government officials finally launched a consultation in April this year on the proposed changes to the country’s stock loan regulatory framework, to eliminate the disadvantageous treatment of Spanish mutual funds compared to their peers in other European countries.
The International Íø±¬³Ô¹Ï Lending Association (ISLA), a trade association established in 1989 to represent the common interests of participants in the securities lending industry, responded to the consultation in May this year to support the initiative and to harmonise the strict existing rules and regulations for securities lending of UCITS fund assets in the EU countries where securities lending is already allowed for mutual funds.
Those rules and regulations were made for reaching a higher profitability while protecting the investments in the light of a unique Capital Markets Union agenda across Europe. The new regulation—most likely to be announced in Q1 2019—will allow Spanish mutual funds to perform its securities lending business on the same legal framework as most of the other European-based investment funds already do.
According to sources who are familiar with the situation, the current ministry of economy, Nadia Calviño, has approved the suggested new regulation. It now must be published first in a public audience/hearing and after receiving the comments of interested parties it will be sent to the Council of State for final approval.
An analysis of Inverco with data provided from DataLend lead to very promising results of the upcoming new opportunities for the Spanish investment fund industry.
Following Inverco’s proposal, allowing funds to lend their entire portfolio, in line with the European Íø±¬³Ô¹Ï and Markets Authority (ESMA) guidelines, the study delivered the following results: It is likely to lend more than 60 percent of the current assets of respective Spanish investment funds.
In absolute terms, it will mean new liquidity of about €180 billion asset value available for lending.
Market analysis indicates that the potential additional income, created by the new types of securities lending transactions will be at least around 10 to 14 basis points (0.1 to 0.14 percent), which equals an annual income of approximately €255 million.
This huge—currently untouched—market potential will force Spanish and international custodians, asset managers as well as investment banks and broker-dealers to provide a reliable infrastructure to Spanish investment fund managers to help them to distribute the lendable assets, manage the respective collateral properly and enable them to receive the forecasted additional revenues on their investments.
Given the size of the lendable assets and the number of new participants in the market, there will be some investments in the Spanish securities lending market necessary to enhance the current basic IT infrastructure.
Strategic consulting is also essential to evaluate the best strategy for the respective funds and asset managers to enable them to lend out those newly available assets.
Given the short preparation time, it is crucial for the business to put the necessary infrastructure in place within a short time frame, to gain from ‘first mover advantages’ with an early entry in this new market segment.
It will be essential for any market participant who is after a part of this ‘big new cake’ to develop and provide a proper digital IT-platform with full connectivity to the respective investment funds as well as to other service providers like market data providers, post-trade and settlement providers and reporting tools for Íø±¬³Ô¹Ï Financing Transaction Regulation as well as CCP’s.
Comyno is already active with strategic advice about this topic and it’s newly enhanced ‘C-one’ platform has been upgraded to be able to deliver tailor-made solutions and full connectivity to enable investment funds, broker-dealers, banks, custodians and agents to explore and make use of this new market opportunity arising in Spain in the coming year.
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