Meeting the requirements of multiple regulatory regimes may cause some institutional investors to exit the securities lending market, rather than comply with the array of new rules.

That’s the view of the International Securities Lending Association (ISLA), which released its annual Securities Lending Market Report on Tuesday.

The trade body cited SFTR, the Bank Recovery and Resolution Directive (BRRD), the Central Securities Depository Regulation (CSDR) and further restrictions on Ucits funds as potentially damaging to the industry.

“The combined and rolling impact of compliance with various regulations may cause some lenders to withdraw from the market,” ISLA warned.

"In turn, this could lead to a loss of market liquidity and make it harder and more expensive for institutional investors to invest in equity markets.

"Government institutions would also have a harder time when it comes to issuing and manage existing government bond programmes," the study added.

Securities lending - which involves the loan of a security from a lender, often an institutional investor such as a pension fund or fund manager, to a borrower, usually a broker/dealer or hedge fund - came under scrutiny by policy makers globally after the 2008 financial crisis.

In its latest report, ISLA also notes that market behaviour has already changed as regulation begins to move into legislation and implementation.

Basel III and the Liquidity Coverage Ratio (LCR), for example, have effectively created a term market in high quality liquid assets (HQLA) that didn't exist two years ago.

LCR requires that banks hold HQLA that exceed their expected net cash outflow for the next 30 days, creating consistent demand for government bonds.

Figures from DataLend suggest that the proportion of three-month or longer loans has increased from 8% at the end of 2013 to 12% by the end of June 2015 at which point open/rolling securities lending transactions were reported at 84% of all transactions.

In a recent research note, Steve Kiely, head of EMEA securities finance business development at BNY Mellon said many lenders “fight shy of longer-term transactions” due to concerns about locking up their assets, causing potential access problems.

However, he added that it’s important to remember that term-lending is not a binary decision and need not commit a lender’s entire program.

ISLA's report noted the growth in the lending of HQLA and said that there is “considerable potential” for this part of the securities lending market to expand further.

ISLA’s statistics - compiled using data from DataLend, Markit Securities Financing and FIS Global.

• As 31st December 2015 there were €1.8trn of securities on-loan which was broadly unchanged from 6 months earlier.
• Mutual funds and pension plans continue to dominate the global lending pool. Together they again account for 66% of the reported €14trn of securities that institutional investors make available for lending.
• Although mutual funds account for 44% of all securities made available for lending they now only account for 18% of total on-loan balances. This anomaly was identified in previous reports and now appears to be a permanent shift in market behaviour. It is increasingly likely that this reflects the restrictive regulatory environment applied to this sector in respect of securities lending.
• Securities lending is still a very important revenue stream for institutional investors. Figures recently released by Datalend suggest that the securities lending industry globally generated €8bn of revenues in 2015, with Europe accounting for circa €2.6bn.
•  As at 31st December 2015 government bonds accounted for 37% of all securities on-loan. 
• Globally, equities still dominate representing 51% (€1.01trn) of all securities on loan as at 31st December 2015.
• Of securities made available for lending by institutional investors, equities account for just under €9trn of the €14trn of securities held in lending programmes globally.
• The mix between non-cash and cash collateral stabilised during the last six months of 2015 at 60/40 globally. Europe continued to record much higher levels of non-cash collateral as banks and brokers repositioned their balance sheets to comply with new regulations. For example, in excess of 90% of all government bonds which are lent in Europe are now collateralised with non-cash collateral.
• The proportion of equities held in tri-party services fell to 51% from 57% six months earlier. The reasons for this reversal of previous trends may be a combination of more efficient collateral management within banks, reducing the reliance of external funding combined with a natural reduction in business volumes ahead of the year-end.