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
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                      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
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   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
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   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
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   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:
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       •   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.