The International Securities Lending Association (ISLA) has published a consultation paper setting out a proposed model for agent lender disclosure in Europe. Agent lenders, such as custodian banks, lend securities as agent on behalf of underlying principals, such as pension and investment funds, often on a pooled basis. The proposed model will standardize the provision of information from agent lenders to borrowers of securities so that the borrowers can monitor their exposures to those underlying principals and calculate regulatory capital requirements under Basel II. For UK-regulated firms, the Financial Services Authority has stated that borrowers should be receiving full information daily about their exposures at underlying principal level by 1 January 2010 at the latest.
ISLA’s proposed model has been developed by a working group of ISLA member firms, including agent lenders and borrowers and supported by the Capco, the consulting firm. The model builds on the successful US model for agency lending disclosure introduced in 2006. In particular,
– Agent lenders should provide daily files (the same standardized files used in the US model) to borrowers detailing outstanding loans and the allocation of collateral delivered by the borrower according to the underlying principal lenders
– Agent lenders should use the US credit approval process when informing borrowers that underlying principal lenders are joining or leaving their program
– Files should be routed through the same data transmission hub used in the US model, provided by the Depository Trust and Clearing Corporation (DTCC)
– Some changes are proposed to the content of the standard files in order to meet European requirements, including adding reporting of agency repo transactions and facilitating reporting of agency reverse repo transactions on an optional basis.
ISLA is seeking comments on the proposed model by 31 May, including on lead times for implementation. The working group will then agree and publish an implementation timetable so that the model is operational ahead of the 1 January 2010 deadline.