Panellists at the IMN Beneficial Owners' International Securities Finance & Collateral Management Conference in Fort Lauderdale predicted that the industry could be heading to a non-cash environment.
Patrick Morrissey, head of product, strategy, and implementation, securities lending at Vanguard Group, cited: “The environment that we are moving into is seeing participants move into the non-cash space.”
The moderator, Peter Bassler of eSecLending, said to panellists: “Cash versus non-cash, [at the conference] you heard that everyone wants to pledge non-cash on the borrower's side.”
“The interesting thing for me is that the cash markets are giving you a great deal, you can make 20 to 30 basis points with your cash, but the borrowers want to give you non cash—so how do you balance that and what are you doing today in your programmes with the cash/non cash dynamic?”
Dan Kiefer, Investment Manager, Opportunistic Credit, CalPERS, commented: “You have to do something with cash when you have a lot of it and sometimes yields aren't good. We run an intrinsic only programme so we weren't searching for cash yield and our balances would run between $20 to 24 million.”
“When we moved to non-cash it's about finding that table for a smaller cash balance, which gives you a lot more flexibility.”
He continued: “The other thing we noticed when we were bidding off our portfolios was that we weren't getting cash bids because it has become non-economic for a lot of bidders to give us cash bids.”
Morrissey said: “At Vanguard, we have specials on focus. As more participants lean towards the non-cash space, we are beginning to slowly see the environment we are heading into as being one where the very lowest rate securities are the ones which could become more commoditised by still trying to be a cash programme as opposed to the super specials securities.”
“If you're going to be anything but a specials programme, you need to think about that kind of diversification in terms of whether you're going to take treasuries for collateral and what that looks and feels like.”
He added: “But ultimately at the end of the day, we are seeing commoditisation of the very lowest rates securities by being in traditional cash class versus the other dynamic.”
Morrissey then asked the panel: “What are the biggest challenges of getting the treasury management function?”
One panellist replied: “The idea of securities lending, while they understand risk and rewards, is not necessarily something that they understand on a deeper level, and so it’s about getting their attention on what the opportunity set looks like.”
“A lot of this peer to peer action has been incredibly helpful. Once they understand what we’re talking about, the economics story will be easier to tell.”
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