Securities lending risks increase in “flight to safety” environment
05 August 2011 London
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Risk managers are warning of the impacts on the repo market of weakening sovereign prices in certain European countries.
“Few areas are more technical, nichey”, or esoteric than securities lending,” wrote Mitchell Shames, partner at Harrison Fiduciary. “If plan sponsors want to partake of the benefits of securities lending, then they must really understand the risk.”
The last time securities lending programmes froze, it was on the back of mortgage-backed securities and related derivatives. This time, it could be sovereign debt, he notes.
Shames recommends scrutiny of two risk situations: short-term paper held by collateral pools and collateral posted by broker-dealers.
The role of the repo market has been brought into sharper focus since wrangling over raising the US debt ceiling increased the perceived risk of US Treasuries - yesterday, interest on T-bills turned negative. And BNY Mellon announced fees for deposits over $50 million in response to a sudden rise in cash holdings, the FT reports.
In Europe, sovereign debt contagion fears over Spain and Italy against a backdrop of equities selling off has prompted the European Central Bank to intervene, according to various media reports.
The Swiss National Bank announced a surprise cut in interest rates to almost zero and committed itself to a renewed round of quantitative easing to stem the appreciation of the Swiss franc, wrote Stefan Angele, head of investment management, Swiss & Global Asset Management.
“Few areas are more technical, nichey”, or esoteric than securities lending,” wrote Mitchell Shames, partner at Harrison Fiduciary. “If plan sponsors want to partake of the benefits of securities lending, then they must really understand the risk.”
The last time securities lending programmes froze, it was on the back of mortgage-backed securities and related derivatives. This time, it could be sovereign debt, he notes.
Shames recommends scrutiny of two risk situations: short-term paper held by collateral pools and collateral posted by broker-dealers.
The role of the repo market has been brought into sharper focus since wrangling over raising the US debt ceiling increased the perceived risk of US Treasuries - yesterday, interest on T-bills turned negative. And BNY Mellon announced fees for deposits over $50 million in response to a sudden rise in cash holdings, the FT reports.
In Europe, sovereign debt contagion fears over Spain and Italy against a backdrop of equities selling off has prompted the European Central Bank to intervene, according to various media reports.
The Swiss National Bank announced a surprise cut in interest rates to almost zero and committed itself to a renewed round of quantitative easing to stem the appreciation of the Swiss franc, wrote Stefan Angele, head of investment management, Swiss & Global Asset Management.
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