Disclosure of Equities Securities Lending – February 2009 5. Implementation

It is intended that both the real-time tagging and daily direct-reporting requirements would be given effect by variation to the measures supporting the Financial Stability Standard for Securities Settlement Facilities. This variation would require that ASTC collect and publish data on equities securities lending and would give regulatory backing to changes to the ASTC Settlement Rules to enforce the disclosure requirements on settlement participants. The precise form of the variation is presented below.

The Standard and associated measures set out high-level principles and expectations for licensed facilities and are not prescriptive about the details of implementation. While it will be ASTC's responsibility to implement the regime and establish the necessary arrangements with participants, a broad consensus has been reached with industry participants regarding the details of the regime. These are also set out in this section.

5.1 Variation to the ‘Understanding Risks’ measure of the Financial Stability Standard

As proposed in the Consultation Document, the disclosure regime would be given effect by a variation to Measure 3 of the Financial Stability Standard for Securities Settlement Facilities: Understanding Risks, which currently reads:

The securities settlement facility's rules and procedures must enable each participant to understand the securities settlement facility's impact on each of the financial risks the participant incurs through participation in the facility.

Measure 3 will be varied to require that the system operator make additional information and data publicly available to give participants a more comprehensive understanding of the risks associated with participation. Measure 3 will read:

The securities settlement facility must make sufficient information publicly available, via its rules and procedures and the provision of relevant information on settlement activity, such that each participant is able to understand the securities settlement facility's impact on each of the financial risks the participant incurs through participation in the facility.

The associated guidance will also be varied to explicitly bring data and information on equities securities lending within the scope of the measure.[1]

The operator of a securities settlement facility should supplement clear, comprehensive and up-to-date rules and procedures with other information and data relevant to a participant's understanding of the risks associated with participation in the facility. For instance, participants should have access to sufficiently timely and broadly comprehensive data on equities securities lending to enable them to assess the potential implications for settlement risk. This is particularly important where equities securities loans are bilaterally negotiated and not novated to a central counterparty, but nevertheless settled alongside novated exchange-traded transactions.

The wording of the variation reflects the Reserve Bank's view that a principles-based approach should be retained within the measures underpinning the Standard. This approach allows licensed facilities some flexibility within broadly stated parameters, recognising that the precise details of system design are best worked out in consultation with industry participants.

5.2 The disclosure regime

Broad agreement has been reached with industry participants in respect of the key characteristics of the disclosure regime. It is anticipated that the regime outlined below will satisfy the requirements of the Standard.

Real-time tagging of all securities loan instructions submitted to CHESS

ASX will introduce a new transaction type, ‘L’, in CHESS for loan-related transactions. This will be a mandatory matching field, thereby ensuring accuracy of the data. ‘L’ transactions will be treated as market related and would therefore be prioritised for settlement if ASTC needed to recalculate the batch in the event of a problem. ASX will publicly disclose, on a daily basis, the number and value of ‘L’ transactions per line of stock, alongside the total daily settlements for each security. Monthly publication of data on the securities loan-related proportion of settlement fails would also provide useful information to participants and the Reserve Bank encourages such disclosure by ASTC.

These arrangements will be reviewed after six months. This review will include an assessment as to whether or not there is a case for separate identification of loans and returns. There is no a priori expectation that there will be a change after this review.

Daily reporting to ASX by settlement participants of outstanding on-loan and borrowed positions, by security

This reporting requirement will extend to all settlement participants active in the securities-lending market and will be imposed via ASTC Settlement Rules. To maximise efficiency, the regime will look where possible to build on some participants’ existing arrangements for provision of data to DataExplorers.

Participants will be required to report two sets of figures: the outstanding on-loan position in each line of stock; and the outstanding borrowed position in each line of stock. In each case, it is anticipated that reported figures will be consolidated across the reportee's domestic and international offices. ASX will then aggregate across participants to calculate the outstanding on-loan position in each security, both including and excluding on-lending activity.

Collection of data from active borrowers and lenders who are not settlement participants

The Reserve Bank will work with the industry to identify participants in the securities-lending market who are not settlement participants and who have a material market presence. Commitments will be sought from these participants to provide similar data to ensure wide coverage. As part of this process, the Reserve Bank will investigate whether obligations could be placed on settlement participants to periodically provide information to assist in identifying non‑settlement participants involved in the securities-lending market.

Should these arrangements fail to deliver appropriate levels of coverage, consideration would be given to whether legislative backing for disclosure of securities lending is required.

Quarterly reporting of the aggregate number of shares committed to lending programmes

So as to be able to provide useful comparative statistics alongside the published on-loan data, each settlement participant will be required to report the aggregate number of shares in each line of stock committed to any lending programme under its control. With this series likely to be less variable, these data will be required, via direct reporting to ASX, only on a quarterly basis. As with the data on on-loan positions, the Reserve Bank will work with ASX and the industry to obtain the same data from lenders not bound by ASTC Settlement Rules.

Daily and timely publication by ASX of the aggregate number of shares on loan in each security (both including and excluding on-lending activity)

Given the Reserve Bank's stated objectives, the aggregate data on the number and value of transactions as well as the on-loan position in each line of stock should be published daily with a minimal lag. A final decision on the precise timing of publication will not, however, be taken until the disclosure regime for short selling has been finalised. The Reserve Bank also intends to give further consideration to industry participants’ concerns that early disclosure could reveal lenders’ selling intentions where large recalls were observed in illiquid securities.

Publication by ASX of relevant comparative statistics and FAQs

Interpretation of the data will be assisted by the publication of relevant comparative statistics, including the average daily volume of shares traded in each line of stock and the aggregate number of shares committed to lending programmes as at the end of the preceding quarter. ASX and the Reserve Bank will also work with industry participants to establish a set of FAQs to accompany the published data, to avoid potential misinterpretation.

5.3 Time-line for implementation

The consultation process indicated that there is merit in a phased approach to implementation. Consistent with such an approach, the Reserve Bank will seek full implementation of real-time tagging by early October 2009, and full implementation of direct reporting by end-December 2009. This time-line will allow for the following steps.

  • A pilot phase of direct reporting of outstanding on-loan and borrowed positions from end-April to end-December, initially involving settlement participants and members of ASLA. Initially, reporting would be required on a weekly basis only. The Reserve Bank will work closely with ASX, ASLA, ACSA and settlement participants during this period to ensure data quality and the efficiency of reporting arrangements.
  • Testing of the systems established for real-time tagging prior to full implementation in early October 2009.
  • Cooperative work between the Reserve Bank, ASX and industry participants to identify participants in the Australian securities-lending market that are not settlement participants but have a material presence in the market.
  • At end-March 2010, ASX will conduct a review of the tagging regime and decide whether separate identification of loans and returns is necessary. If the decision were taken to introduce separate loan and return tags, settlement participants would be required to make arrangements to accommodate this by end-September 2010.
  • The Reserve Bank would also assess, on an ongoing basis, whether the data on on-loan positions has adequate coverage to ensure that participants in the market are well informed about securities-lending activity. In the event that the Reserve Bank determined that coverage was inadequate, it would explore changes to the regime, including possible legislative changes, to increase coverage.

Footnote

The guidance is as in the Consultation Document except that the sentence beginning ‘For instance…’ previously read: ‘For instance, participants should have access to sufficiently timely and comprehensive securities-lending data to enable them to assess the potential implications for settlement risk.’ The guidance now clarifies that the scope of the requirement extends only to equities securities lending and allows for the data to be only ‘broadly’ comprehensive to meet the objectives at hand. [1]