Lenders still appear uncomfortable with accepting corporate bonds as collateral, according to new research by the International Securities Lending Association (ISLA).
In its latest market report, ISLA shows that the use of equity collateral increased for the second successive reporting period, but corporate bonds continue to lag well behind.
ISLA notes that non-cash collateral “continues to be a predominantly European phenomenon, with more than 96 percent of all non-cash collateral reported within its survey being held within European triparty infrastructure”.
From that reported data, only 10 percent of the collateral held in European triparty infrastructures was corporate bonds, compared to 45 percent of equities and 45 percent government bonds, according to ISLA’s report.
In North America, non-cash collateral remains around 46 percent of all collateral pledged in respect of equity loans, ISLA says.
Overall, equity collateral share rose from 43 percent as of 30 June to 45 percent by 31 December.
The association attributed the rise to an increase in asset values in the second half of the year, as well as banks’ increasing ability to hold equities in the balance sheets as their overall capital positions improved with underlying profitability.
“Even 10 years after the crisis, lenders still appear uncomfortable with the concept of accepting corporate bonds as collateral,” the report reads. “Consequently, therefore, the increase in equity collateral was broadly matched with a reported fall in the use of government bonds.”
The push for wider acceptance of equities as collateral has been stunted, in part, by the limits posed on US lenders by SEC Rule 15c3-3, which some market commentators predict is due to see some revisions later this year.
Elsewhere, the report noted that the mobilisation and movement of collateral is one of the most strategically important parts that our market can play in the context the final two waves of the Uncleared Margin Rules due in September this and next year.
With some 32 percent of all government bonds held in lending programmes actually on-loan, there is clearly an opportunity for our markets to plan an important role as the buy-side seeks to access high-quality collateral including government bonds, ISLA argues.
Other highlights of the report include:
’On-loan balances rose steadily by some 8 percent between August and October, only to fall dramatically during October. The association says that most of these movements related primarily to the equity securities lending markets.
The global securities finance market generated $8.66 billion in revenues for lenders in 2019, representing a 13 percent drop-off from the year before, according to DataLend.
Mutual/retail funds continue to dominate the global lending demographic, accounting for 48 percent of available supply value. The second-largest lender by fund type is pension funds with 18 percent.
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