SECURITIES LENDING & REPO MARKETS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - OCTOBER 2010

CHALLENGES & OPPORTUNITIES

participants. The improved flow of information and engagement should serve to reduce the opportunity for ‘unintended consequences’ of new regulation. Another example of a posi- tive development stemming from US regulators is the impact of the SEC’s Rule 204, which mandates the closeout of failed sale transactions. This rule led to a significant drop-off in the number of failed deliveries since its introduction 21 . Short-selling in particular remains a concern, reinforced by the recent Greek crisis. Driven by the wish to promote market stability and preserve investor confidence, regulators are discussing how to control short-selling and in particular naked short-selling. Whereas the Committee of European Securities Regulators (CESR) and the UK Financial Services Author- ity (FSA) are focusing on public disclosure and the ability to intervene in an emergency rather than any generalised restrictions, in the United States restrictions rules on short- selling were introduced in February 2010 by the Securities and Exchange Commission (SEC) with no exemption to market-makers 22 . In Europe, following a series of consultations with market participants, the European Commission adopted a proposal for a regulation on short selling on 15 September 2010. Under the draft legislation, short sellers will have to disclose their net short positions to regulators once they reach 0.2% of issued share capital and to the market when they reach 0.5% of issued share capital. National regulators will also be given the authority to restrict or ban short selling in coordination with the new pan-Euro- pean regulatory body for securities trading, the European Securities and Markets Authority (ESMA), which is expected to come into being in Q1 2011. The proposal will now pass to the European Parliament and the EU member states for consideration. Once adopted, the short selling rule would apply from 1st July 2012. Disparate regulation is a real challenge for the business. The US is by far the most regulated market with 15c3-3, RegSHO, Rule 402, Agency Lending disclosure, Rule 2a-7 and the more recently introduced short sale circuit breaker. In the rest of the world, the problem is in some ways more complex in that regulations vary by jurisdiction as already mentioned. The recent attempt by CESR to set standard guidelines for new post-crisis regulation seemed somewhat undermined by the German regulator’s variation from the “standards” 23 .

3.2

Heterogeneous tax frameworks but an on-going harmonisation in Europe

3.2.1

Current tax framework in main countries

The tax treatment of securities lending and repo transactions is largely determined by whether the transaction is deemed to be a secured loan or a sale and repurchase of the securities and whether these transactions receive beneficial tax treatment in the relevant jurisdiction. Tax authorities may treat securities loans and repos differently despite the simi- larities in their economic consequences. The income attached to securities (coupon, dividend) may also be taxed differently from one jurisdiction to another and depending on the investor’s tax residency. Accounting standards may also vary from one jurisdiction to another. We thought it would be interesting to insert hereafter a description of the current tax land- scape in North America, Europe and Asia Pacific. The following tables examine the general tax framework, direct tax considerations, as well as other taxes and considerations in the main countries of business as at 1st January 2010.

21 Source: Goldman Sachs, “Securities lending: New priorities”, April 2010 22 Source: Global Securities Lending magazine, “Still under siege?”, Issue 08, Q2 2010 23 Source: Global Securities Lending magazine, Issue 08 Q2 2010

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