SLT: How do you feel the securities lending industry has withstood the downturn?
McNulty: Generally, the market has fared well. It has survived as a business and it remains very much a live business. It survived the Lehman collapse and even though lenders had large exposures most lenders didn't lose money. If there was a black spot it was cash collateral, where some lenders have lost money. This impact was greater in the US, of course, where cash collateral makes up more than 90 per cent of the market. In Europe the impact was lower, but it did mean that the beneficial owners in Europe who historically took cash collateral had to take another look at their strategies.
The Lehman failure showed that market conventions served the industry well in terms of credit control and risk management practices. After Lehman, the industry took a step back and focused on the risks, constraints and controls.
SLT: You became chief executive last August. Was the market still in the eye of the storm, or had the worst already happened?
McNulty: The worst of the turmoil had mostly worked itself out. Since I took the helm a very large part of our focus has been working our way through the vast amounts of literature coming from regulators
SLT: How do you feel the regulatory environment will change? Is there anything industry participants should be wary of?
McNulty: We've seen activity designed to prevent naked short selling in Germany and France and we know for sure that something is going to happen covering this area.
We also expect some changes to the rules around transparency and possibly around cash collateral, although the latter seems less likely now. We are seeing demand in some parts of the world for reporting of securities lending transactions to become more transparent and public.
SLT: What are your views on a pan-European regulatory environment?
McNulty:We strongly believe there should be a harmonised EU view on regulation. We started the year with the belief that there would be a pan European approach to short selling but we have seen countries go it alone.
This view isn't just held by us; the European Commission also wants to see it. But we're some way from harmonisation. CESR looked at short selling regimes across the EU and commented there had been an uncoordinated approach to it through the crisis. We were optimistic that this would happen at the start of the year but we're not seeing it yet.
SLT: What has ISLA been able to do to ensure the securities lending industry has thrived over the past couple of years?
McNulty: We've been busy! Firstly, we've produced a paper that gives an academic view of short selling to help people understand that it's really not a bad thing. We've also designed information for beneficial owners to explain securities lending - how lending programmes work, the risks associated with securities lending and what happens in the event of default.
One of our main roles is to provide a forum for our members, to discuss face-to-face, over the telephone or electronically, issues of common interest and act as a sounding board.
We also have quite a bit of contact with regulators. We've been talking to the FSA, particularly on the subjects of increasing understanding amongst beneficial owners and on custody banks running securities lending programmes. We're also regularly in touch with CESR regarding short selling, Corporate governance and transparency, and we have had dialogue with other regulators like the AFM in the Netherlands .
The regulators themselves are always very interested in the views of the industry, but they are often caught between a rock and a hard place - while they want the best practices for the industry, political motives can sometimes come into play, which affects the work they do.
SLT: How closely do you work with the associations in Asia and the US?
McNulty: We have a good dialogue with the RMA and PASLA but this tends to be driven by the issues that arise - we talk when things happen and work together when it makes sense
SLT: While it has never been at the top of the headlines in the mainstream media - in the way derivatives or MBS have - has the reputation of securities lending been harmed during the downturn? Has it led to firms - especially the beneficial owners - taking a more conservative approach?
McNulty: Hopefully this is a good thing - because it's not a problem it's not taking top priority in the eyes of the regulators, governments or media. And while, for example, the FSA believes more beneficial owner awareness is necessary, it wants the industry to self-police wherever possible. That said, there is no doubt that beneficial owners are continuing to take a conservative approach.
SLT: Is there enough knowledge amongst beneficial owners?
McNulty: We do think there are some beneficial owners who need to know more. It's not a problem unique to securities lending, it affects the whole investments industry - these funds have a lot of financial instruments to deal with and if you're a trustee of a pension fund with limited investment experience it's not easy to learn about everything. We are working with other trade association on a concise guide to help beneficial owners understand how the business works.
SLT: What are your ambitions and hopes for the future?
McNulty: For the market as a whole we'd like to see things settle down and the disruptions dissipate. We'd also like to see a regulatory regime that is reasonably globally consistent come into force.
From the point of view of ISLA, we'd like to develop an educational programme for participants. We're already in the early stages of this development and have plans to roll out a more comprehensive
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