US plan sponsors look to alternative repo - Finadium
23 January 2012 London
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US plan sponsors are starting to look closer at alternative repo products as a solution to the challenges they face in securities lending and collateral management programmes, according to the latest Finadium survey.
One of the key findings of the survey is that repo for equities and illiquid assets as well as term repo are slowly gaining in popularity as a way to incrementally increase collateral returns, though they are viewed as riskier.
“In the past few years, there has been a well-known pendulum swing away from using collateral to reach for increased returns towards much more conservative collateral investment choices which limit the level of return…what we are seeing now is more plan sponsors saying they will look at equity or illiquid ABS repos,” said Josh Galper, managing principal at Finadium and author of the report.
Banks need to fund paper at a time when high quality liquid collateral is getting scarcer. Meanwhile, plan sponsors are reporting that they are feeling they might be outbid or outmanouevred for traditional products if they are not willing to consider alternatives.
“This is a slow but real change, recognising that treasury and agency repo is either in insufficient supply or does not provide sufficient returns...Under Basel III, treasuries and agencies are high quality liquid assets and when liquidity coverage ratios start to kick in, banks need to be as agile as possible about funding their non-high quality liquid asset positions…they may choose to give repos to the fund that takes both treasuries and illiquid ABS’ or equity repo,” Galper explained.
Though equity repos are perceived as riskier by respondents to the survey, Galper pointed out that particularly for overnight equity repo, risks are low with some agent lenders now offering indemnification.
Now in its fifth year, the Finadium survey of US plan sponsors looks at the attitudes and opinions of these institutional investors across securities lending, collateral management and custody.
One of the key findings of the survey is that repo for equities and illiquid assets as well as term repo are slowly gaining in popularity as a way to incrementally increase collateral returns, though they are viewed as riskier.
“In the past few years, there has been a well-known pendulum swing away from using collateral to reach for increased returns towards much more conservative collateral investment choices which limit the level of return…what we are seeing now is more plan sponsors saying they will look at equity or illiquid ABS repos,” said Josh Galper, managing principal at Finadium and author of the report.
Banks need to fund paper at a time when high quality liquid collateral is getting scarcer. Meanwhile, plan sponsors are reporting that they are feeling they might be outbid or outmanouevred for traditional products if they are not willing to consider alternatives.
“This is a slow but real change, recognising that treasury and agency repo is either in insufficient supply or does not provide sufficient returns...Under Basel III, treasuries and agencies are high quality liquid assets and when liquidity coverage ratios start to kick in, banks need to be as agile as possible about funding their non-high quality liquid asset positions…they may choose to give repos to the fund that takes both treasuries and illiquid ABS’ or equity repo,” Galper explained.
Though equity repos are perceived as riskier by respondents to the survey, Galper pointed out that particularly for overnight equity repo, risks are low with some agent lenders now offering indemnification.
Now in its fifth year, the Finadium survey of US plan sponsors looks at the attitudes and opinions of these institutional investors across securities lending, collateral management and custody.
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