ESMA warns of dangers arising from securities lending to retail buyers

The European Securities and Markets Authority (ESMA), the EU’s monetary markets regulator and supervisor, in the present day revealed a Assertion on securities lending to retail purchasers.

Sure corporations within the EU have interaction in securities lending and different securities financing transactions (SFTs) in relation to retail consumer monetary devices. Whereas SFTs might convey the good thing about producing additional returns on monetary devices, SFTs are additionally a dangerous and sophisticated observe that’s obscure for the typical retail consumer. MiFID II due to this fact imposes strict necessities regulating the usage of consumer monetary devices.

From the attitude of the investor, SFTs might convey the good thing about producing additional return on his or her monetary devices, the place these are lent out. Nonetheless, in addition they convey extra dangers, resembling counterparty and collateral shortfall danger.

As well as, measures taken by the agency to safeguard the consumer’s possession rights is not going to apply to monetary devices utilized in securities financing transactions (SFTs) resembling securities lending. Merely put, the investor lending out his or her monetary devices will incur a loss if the exterior borrower shouldn’t be in a position to return the borrowed monetary instrument and if the worth of the collateral is inadequate to cowl the lack of the monetary instrument that’s lent out and the funding agency is unable to compensate for the loss.

• ESMA warns that revenues from securities lending ought to instantly accrue to the retail consumer, internet of a traditional compensation for the agency’s providers.
• Additionally, specific prior consent shouldn’t be sought by the use of the agency’s common phrases and circumstances.

To make sure that purchasers are conscious of the dangers of SFTs when offering their specific prior consent, corporations ought to, in good time earlier than requesting this consent, present purchasers with satisfactory info on the dangers concerned. For instance, within the extra and distinct step within the consumer’s onboarding course of, info will be offered on the dangers concerned, earlier than requesting the consumer’s specific prior consent.

ESMA will proceed to observe the observe of securities lending to retail purchasers and, if wanted, concern additional technical recommendation to the European Fee on this matter.