Securities lending "takes a hit" from liquidity buffers - Finadium
27 October 2011 Concord
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Liquidity buffer regulations may see securities lending take a hit since equities are not considered "high quality liquid assets" (HQLAs).
The liquidity coverage ratio (LCR) prescribes that HQLAs must, on the applicable reporting date, be equal to at least 100 per cent of net cash outflow over a 30-day time horizon, according to a recent Finadium report. The measures are intended to mitigate risks from both institutional and systemic shocks during any future banking crises.
Under Basel III, financials, high yield, equities, convertible bonds and emerging market paper are not considered HQLAs and cannot be used to improve a bank's LCR, while qualifying "level II" securities (government bonds rated between A- and A+, agencies and corporate or covered bonds rated greater than or equal to AA-) cannot compose more than 40 per cent of the total pool of HQLA after a 15 per cent haircut.
Essentially, stock loans will need to offer attractive enough returns to make up for the low quality assets and broker-dealers and banks may be obligated to extract additional spread from clients for principal lending transactions, when these intermediaries behave as the sole counterparty.
The observation period for LCR implementation began this year to monitor the implications for financial markets, credit extension and growth with introduction including revisions in 2015.
The liquidity coverage ratio (LCR) prescribes that HQLAs must, on the applicable reporting date, be equal to at least 100 per cent of net cash outflow over a 30-day time horizon, according to a recent Finadium report. The measures are intended to mitigate risks from both institutional and systemic shocks during any future banking crises.
Under Basel III, financials, high yield, equities, convertible bonds and emerging market paper are not considered HQLAs and cannot be used to improve a bank's LCR, while qualifying "level II" securities (government bonds rated between A- and A+, agencies and corporate or covered bonds rated greater than or equal to AA-) cannot compose more than 40 per cent of the total pool of HQLA after a 15 per cent haircut.
Essentially, stock loans will need to offer attractive enough returns to make up for the low quality assets and broker-dealers and banks may be obligated to extract additional spread from clients for principal lending transactions, when these intermediaries behave as the sole counterparty.
The observation period for LCR implementation began this year to monitor the implications for financial markets, credit extension and growth with introduction including revisions in 2015.
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