Regulators acknowledge the importance of securities lending to market liquidity


Two things caught my attention recently and although from very different places, they have a common theme – Liquidity.

First was the announcement from the Taiwan Stock Exchange (TWSE) that it plans to allow unlimited day trading for all securities eligible for margin trading and short selling.  This means almost all stocks, ETFs and warrants listed on its market.  The expansion itself is exciting, but the “why” is of just as much interest.  In its released statement, the TSWE highlighted the driver of change was to increase choice, in this case more hedging instruments, and to deliver increased trading volume, i.e liquidity.

Second was the European Securities and Markets Authority (ESMA) release of its final technical standards for settlement disciplines.   While the technical provisions have yet to be delivered, ESMA has excluded all transactions with terms of 30 days or less, from mandatory buy-ins.   Buried deep within the 111 pages, page 22 provided some insight into the reasons for this:  ESMA felt that a mandatory buy-in policy would mean lenders had no incentive to lend any securities for which a buy-in was even a remote possibility.  This was also a recognition that securities financing activity is vital for market liquidity and support settlement efficiency.

As global regulations crystalize and market behavior and structures are altered accordingly, it is paramount that lawmakers are sensitive to the impact on liquidity and investor choice.  Although there is no doubt that regulations are written with the best of intentions, it is encouraging to see acknowledgement that securities lending can help support market liquidity and in some instances provide investors with more choice.