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NEWS

Update on Agency Lending Disclosure in Europe

A Co-Operative Solution to US ALD

The disclosure of underlying principal details has been a regulatory requirement for Agency lenders in the US since the start of October 2006. Response to the introduction of this additional regulation into the securities finance world was accompanied by an unprecedented level of co-operation between market participants, regulators and IT solution providers. Parties worked together for a period of 2 years, incorporating the credit pre-qualification process, in order to ensure that the requirements could be met in the most effective manner. SunGard, EquiLend and DTCC joined forces to provide a service that allow lenders and borrows to supply files to a single service provider, regardless of the service used by the end user of the data. Today, over 100 market participants provide their files directly into the SunGard hub, with in excess of 2 million records being transmitted through the hub on a daily basis.

European ALD/Basel II Co-Operative Solution to US ALD

New regulations regarding the disclosure of principal were introduced into Europe as part of Basel II capital adequacy reporting from the start of 2008. There does, however, still appear to be much confusion in the market as to who this impacts and what must be done. This may be due in part to the fact that there are multiple authorities involved, introducing the potential for each to translate the EU Basel II requirements differently. In the case of the FSA, there is the option for interim monthly reporting, with the move to the mandatory daily reporting deadline being held-off until January 2010. Although this does not give the Borrowers full relief from the capital implications of dealing with lenders who do not provide the necessary trade and collateral reporting files daily, it does provide a lead-time to allow FSA-regulated participants to get automated processes in place.

In order to assist the market in implementing a solution, ISLA formed the ALD Working Group, in which SunGard is a founding member, and have been working in conjunction with consultants Capco to identify a workable model for the final solution. A survey of market participants was initially sent out and although the deadline for responses had to be extended numerous times in order to gain a representative number of responses, a consultation document on the Final Model for Agent Lending Disclosure in Europe is currently under circulation. This includes proposals, largely based on the existing US model, with additions to specifically handle:

  • DTC access for non-DTC members
  • Repos/Reverse Repos
  • Tri-party Collateral
  • DBV Collateral
  • Industry Classification Codes
Following numerous meetings of the Working Group and the broader membership, the final version of this document will be circulated by mid-July, just prior to its presentation to the FSA. If, as anticipated, the proposals are accepted, work can begin, based upon the implementation timetable drawn up by ISLA, working towards full compliance by January 2010 latest.

Interim Solution

In the meantime, the priority for the Brokers has been to receive data from their largest lenders and they are now exchanging files through the existing mechanisms. With this in place we understand that Brokers will now be encouraging their remaining lenders to provide the required data files on as frequent a basis as possible. Even those Lenders who provide details of the underlying principals at the time of trade are required to provide loan and collateral information in the agreed file formats in order to allow the Brokers to carry out the necessary capital adequacy calculations. Lenders using Global One can do this very simply using the ALD Interface, with or without the SunGard hub.

Benefits of the SunGard solution for Lenders include:

  • Daily trade and collateral files produced in standard format
  • Where collateral is posted at counterparty of fund major level, the collateral is allocated to individual funds for inclusion in the file - using the collateral restrictions as stored in Global One
  • Optional use of the SunGard hub, giving a single point of delivery for files to all participants with a valid Routing Id. We format and generate files for delivery to the hub, and route the file to your Borrowers
  • Minimal technical involvement for set up
  • Minimal ongoing file management on a daily basis
  • Optional usage of 'approval of principals' process. If utilised, Global One will prevent loan allocation to funds that are not 'approved' by the Broker
For Brokers benefits are:
  • Minimal ongoing file management on a daily basis as files are received from a single source, with the format pre-validated
  • Minimal technical involvement for set up
  • Housekeeping of non-submission is centrally managed
  • Option for receipt of a single aggregated (consolidated) file for all lenders
  • Option for reconciliation of lender positions received with own positions with web review portal
  • Management of principal validation managed through a central process with web review portal
If you require further information, please contact your local
Client Services Group.
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