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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.
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