The International Securities Lending Association (ISLA) said it broadly welcomes the European Securities and Market Associations (ESMA) guidelines on ETFs and UCITS.
The guidelines, aimed at strengthening investor protection and harmonizing regulatory practices across this important fund sector, published last week states that all revenue net of operating costs generated by securities lending and other efficient portfolio management techniques in a UCITS fund should be returned to the fund.
ISLA notes that the guidelines have been the subject of some speculation in the press concerting the charging of fees for securities lending services, much of which is inconsistent with the Guidelines and stems from a misunderstanding of how the securities lending market works.
After extensive consultation with ESMA on the matter, ISLA said it broadly welcomes the new Guidelines which will increase the level and the quality of information provided by UCITS to their investors, clarify the criteria for the management of collateralized transactions such as securities lending, repo and reverse repos and OTC derivatives, and set out the types of financial index in which UCITS may invest.
In a press release on its website, ISLA said ESMAs guidance on securities lending is designed to create some clear principles that the association fully supports: that securities lending programs should be run for the benefit of the UCITS, and that fund managers should not be unduly compensated through the charging of additional fees where there is no explicit and valuable service provided.
Additionally, in ISLAs opinion there is nothing in the guidance that precludes a securities lending agent, be that the fund manager, custodian or third party, from charging a commercial fee for their services. Such fees would be regarded as part of the direct and indirect costs, which the Guidelines state may be deducted from revenue.
Where a manager charges an additional fee designed to cover the expenses and costs associated with the administration and oversight of the securities lending program carried out by a custodian or third party, ISLA believes the guidance would require that such fees be set at a level commensurate with the costs of these additional services.
(JDC)