The International Securities Lending Association (ISLA) has joined forces with a multitude of other industry associations to urge a 12-month delay in the implementation of the regulation, laid out in an open letter to the European Commission.
Currently scheduled to come into force on 3 September 2020, the regulation is an amendment to SRD I (2007/36/EC) that entered into force in 2007 post the financial crisis, and aims to improve shareholders ability to exercise their rights across multiple markets whilst utilising technology to enhance communication between firms, intermediaries and the shareholders. It’s a big deal for the securities lending markets because it changes the rule around corporate governance, in particular by requiring asset managers to disclose their use of proxy advisors to institutional investors, and inform the regulator of their policy on securities lending.
Eleven trade associations including the European Banking Federation (EBF), the Association for Financial Markets in Europe (AFME), the Association of Global Custodians (AGC), the European Central Securities Depositories Association (ECSDA), and the Securities Market Practice Group (SMPG), warn that while they had concerns over current implementation efforts even before the advent of the global COVID-19 crisis, the ongoing pandemic would strain the industry’s capacity to implement the directive in time.
“At this stage, the Associations believe it will be difficult, or nearly impossible, to meet the implementation deadline of 3 September 2020,” says the letter. “In particular, due to the unprecedented disruptive nature of the pandemic, the daily activities of our members are significantly impacted by the necessary emergency measures put in place to mitigate the consequences of the COVID-19 crisis. These include substantial internal reprioritisations and shifts of resources which make it more difficult for all market actors to ensure the complete and timely compliance with SRD II.”
Despite SRD II programmes of financial infrastructures and several market participants being currently in line with required delivery timelines, firms have had to implement effective contingency plans in the face of the COVID-19 pandemic, and the exceptional and widespread impact of the virus and the necessary measures to contain it are inevitably affecting the operational capacity of financial institutions – including the redeployment of IT and technology staff towards business continuity measures.
“ “Run-the institution” measures have gained full priority over “change-the-institution” measures,” point out the trade associations, who claim that this has “deeply affected” institutions’ capacity to focus on SRD II requirements – especially regarding the testing phase of the processes of transmission of information along the chain of intermediaries, which was intended to be carried out in the coming months, but which is now being postponed due to the pressure of COVID-19 on IT core operations.
The letter also notes that, while under national company law annual general meetings (AGM) are usually held by the end of Q2, the pandemic is now forcing issuers of shares to respond to the crisis by postponing the annual meetings for shareholders or organizing them on a virtual basis. This measure impacts not only the internal organisation of companies and financial actors (to adapt process flows to support the new rules introduced to facilitate shareholders rights), but also, depending on the date of the postponed AGMs, affects the timetables for putting in place all requirements set out in the upcoming regulation in time for the new meetings.
“Our members consider it very unlikely that all the operational procedures in support of the new general meetings season, expected around September, could be carried out in full compliance with SRD II,” it stresses. “A situation of fragmented compliance with requirements would create an additional burden, and therefore become even more complicated to manage.”
Compounding the challenge for the industry are the existing gaps and discontinuities among the various national SRD II implementing legislations, which the trade associations complain have been significantly exacerbated and made harder to reconcile by the pandemic crisis. To meet this challenge, the 11 industry bodies have set up an Industry Steering Group, to oversee progress towards SRD II, which is currently in the process of finalising a specific set of Market Standards, intended to achieve a coherent and consistent implementation of the legislation.
“Implementation in September 2021 would seem to be the rational and reasonable date for postponement in order to avoid the (delayed) AGM and dividend payment period in Q4 2020 and the next AGM and dividend payment season in Q2 2021,” concludes the letter.
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