Stock Lending and Repo Commitee
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STOCK LENDING AND REPO COMMITTEE TUESDAY 9 DECEMBER 2003 MINUTES OF MEETING HELD AT THE BANK OF ENGLAND Members present: David Rule Bank of England, Chairman Nicola Stead Bank of England, Secretary Mark Hutchings International Securities Lending Association/ AIG Richard Steele International Securities Lending Association/ JP Morgan Chase Ian Fox London Money Markets Association/ HBOS Margot Marshall Financial Services Authority Nick Fisher UK Debt Management Office Dagmar Banton London Stock Exchange Jason Waight CRESTCo David Entwistle London Investment Banking Association/ Deutsche Bank Adrian Tgetgel International Securities Market Association Segun Aganga London Investment Banking Association Prime Brokerage Committee/ Goldman Sachs Michelle Balding London Investment Banking Association/ Credit Suisse First Boston John Serocold London Investment Banking Association/ Chair, SLRC Netting Sub-group Charles McSwiggin Investec Steve Russell London Investment Banking Association/ HSBC Hugh Gibson Association for Payment Clearing Services/ HSBC Cameron Dunn European Repo Council/ Merrill Lynch Simon Hills British Banking Association Chris Kerr Inland Revenue Also present: Geraldine Levy Financial Services Authority Elaine Graham SLRC Netting sub-group/ Freshfields Bruckhaus Deringer Alastair Robson Deutsche Bank John Rippon Bank of England 2 David Sheppard Bank of England Steve Kirby Bank of England Antony Beaves Bank of England Simon Ainsworth Bank of England MINUTES OF MEETING HELD ON 27 AUGUST 1. The minutes of the previous meeting were agreed. Any further comments on the minutes should be referred to the Secretary. Previous meetings’ minutes are available at: http://www.bankofengland.co.uk/markets/slrc.htm 2. The Chairman announced the appointment of Nicola Stead as the new Secretary of the SLRC, replacing Simon Ainsworth. MJK CLEARING INC CASE 3. The Committee’s attention was drawn to this American court case, where the trustees of MJK Clearing Inc are attempting to recover damages following the alleged manipulation of the market prices of securities. The Chairman stated that this case appeared to raise risk management issues of interest for the wider securities lending market, and asked if there were any comments from the Committee and if there had been any discussion in the market. Attendees were not aware of any such discussion in the London market, but it was noted that the case was being widely followed in the USA. INSURANCE UNDERTAKINGS AND RE-ORGANISATION AND WINDING UP DIRECTIVE 4. Following the discussions at previous meetings, Mr Steele reported that a deed of charge had been developed which expressly allowed for securities subject to the charge to be lent. The deed had been reviewed by a QC. Insurance companies were due to meet later in December to approve the wording. Ms Marshall noted that the FSA insurance regulators were aware of these developments. SLRC/ISLA/BBA/LSE/LIBA/ACT PUBLICATION ON SECURITIES LENDING 5. The Chairman reported that, in the light of the discussion at the previous meeting, the text had been redrafted to include a new chapter on Risk Management and an 3 Executive Summary, and it was now close to being finalised. The deadline for final comments on the text was 16 December. 6. The Chairman said that the Association of Corporate Treasurers had agreed to co- sponsor the publication and the National Association of Pension Funds and Association of British Insurers would welcome it. Questions to consider now concerned printing (being undertaken by the BBA), distribution (especially by market participants) and promotion, including the press release. PROPOSED TRANSPARENCY DIRECTIVE 7. Mr Rippon confirmed that the text of the proposed Transparency Directive had been modified to clarify that disposals and acquisition of bonds at or above the reporting thresholds would not need to be notified. There were still outstanding issues, however, concerning the implications for equity repo and equity borrowing and stock lending. 8. Ms Levy then briefed the Committee on the requirements and coverage of, and timetable for the Directive. Ms Levy’s notes on the Directive were circulated at the meeting and subsequently to members, and are attached to these minutes. 9. Ms Levy also said that the Companies Act 1985 might need amendment in the light of the Directive but it was difficult to judge to what extent until the final text had been agreed, due in February/ March. Under the current draft, it appeared that notification requirements would not apply to securities borrowing unless the borrower declared an intention to vote. 10. Ms Levy reported that discussions on Level 2 of the Directive (i.e. technical implementing measures) would start in mid-January, and any queries should be addressed to her. Level 2 refers to the actual rules that will give effect to the Directive. UK ANNEX TO THE STOCK BORROWING AND LENDING CODE 11. Mr Rippon reported that the first full draft of the Annex had been circulated to an SLRC sub-group for comment, and that a draft would be released to the wider 4 SLRC once the sub-group had commented. He also said that the sub-group would begin work on updating the main code shortly. Mr Rule asked whether this should cover the issues around equity lending and voting which the Committee had discussed at previous meetings. Possible points to include might be: • that it was unacceptable to borrow stock for the purpose of influencing a shareholder vote; and • that lenders should consider in what circumstances they would cease to lend stock, or recall stock already on loan so that they could vote, in the context of their wider approach to corporate governance; these policies should be communicated to their agents, where appropriate. It was agreed that these issues should be addressed. Mr Rule asked whether they should be covered in the main Code rather than the Annex. Committee members agreed that it was more appropriate to amend the main Code. INTERNATIONAL CORPORATE GOVERNANCE NETWORK 12. Mr Steele reported that the network consisted of institutional investors and sought to facilitate the exchange of information on corporate governance practices internationally. It had a securities lending committee and ISLA had met the Chairman (Andrew Clearfield) recently. He thought that it would be helpful for the SLRC to write to the IGCN expressing an interest in following its work on stock lending and voting. [done] 2004 WORK PROGRAMME 13. The Chairman introduced the proposed 2004 work programme and asked for comments. The Committee thought one focus of its work in 2004 should be on the implications of international and UK regulatory and legal developments, for repo and stock lending markets-- particularly EU developments and Basel 2. 14. Mr Sheppard reported on the Shareholder Voting Working Group and said that the main issue concerned so-called ‘lost’ votes. Work was under way to address this, and impediments to a smooth voting process would be identified by January. By late 2004 the intention was that these impediments would have been resolved or there should be a work programme in place to address the issues. The Committee 5 noted the appointment of Paul Myners as Chairman of the Shareholder Voting Working Group, and agreed that the Chairman should write to Mr Myners drawing his attention to the earlier correspondence between the Chairs of SLRC and the Shareholder Voting Working Group. [done] GILT REPO MARKET 15. Mr Ainsworth updated the Committee on the results of the Bank’s recent questionnaire of market participants, following the discussions of repo ‘shaping’ at the June and August meetings of the SLRC. 18 institutions had responded to the question whether they would be in favour of a proposal to shape all sterling repo trades into £50mn parcels for settlement. Of these, • Seven were against such a proposal, citing reasons such as the low level of failed sterling repo trades, increased trading and settlement costs, and the fact that it is currently possible to shape trades if deemed necessary; • Two were in favour of such a proposal, citing the reduced risk of fails and the fuller conformity with international standards; • Three supported the proposal but with some reservations, such as the view that there was no strict need for sterling repos to be shaped, £50mn might not be the optimal shape, and shaping would need to be part of an automated process; • Six expressed no preference. 16. The Chairman said that the results were consistent with the view of Committee members at previous meetings that there was no consensus in favour of a shaping convention in the gilt repo market. 17. ISMA subsequently reported that the Market Practices Committee had endorsed the shaping of transactions into appropriate sizes, stating that it would contribute to smoother settlement processes in the market place. COLLATERAL DIRECTIVE 18. Mr Beaves reported that the EU Collateral Directive would come into force in the United Kingdom on 26 December. Regulations would be published by the week beginning 15 December. Key components were: 6 • Removal of registration requirements for certain forms of charge over securities and cash; • Recognition of the ‘right of use’ of a collateral taker to on-lend/sell/ pledge or otherwise deal with such securities as owner; • Appropriation of charged cash or securities would not require court orders for foreclosure, providing an alternative for realisation of collateral if a collateral provider defaulted; • The adoption of the so-called PRIMA principle: i.e. identification of the relevant government law for securities held through an intermediary and subject to collateral arrangements is to be determined by reference to the location of the intermediary (although the wording of the Directive/ Regulations would require modification in due course following the adoption of the principles contained in the Hague Convention by the EU/ member states). NETTING SUB-GROUP 19. Mr Serocold had no comments from the netting sub-group. ANY OTHER BUSINESS 20. Mr Dunn drew the attention of the Committee to the ISMA/ ERC joint repo market survey, which was to be completed by 10 December. 21. On GMRA updates, Mr Tgetgel reported that new legal opinions were being sought for EU Accession Countries. Market participants should contact him with any comments.